Democracy and family wealth regulation in Kenya: A responsive regulation approach to inheritance tax

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DISCLOSURE STATEMENT

No potential conflict of interest was reported by the author(s).

Notes

1 The East African region usually refers to the following states: Kenya, Uganda, Tanzania, Rwanda and Burundi. See World Bank, ‘Kenya Economic Update December 2022: Continued Rebound, but Storms Cloud the Horizon – Policies to Accelerate the Productive Economy for Inclusive Growth’ <https://documents.worldbank.org/en/publication/documents-reports/documentdetail/099400212072220291/p1797690ba796602b092ba0149f48220ed7> accessed 25 January 2024.

2 World Bank (n 1).

3 African Development Bank Group (hereafter ‘AfDB’), ‘Kenya Economic Outlook 2023’<www.afdb.org/en/countries-east-africa-kenya/kenya-economic-outlook#:~:text=GDP%20is%20projected%20to%20grow,is%20expected%20to%20remain%20tight> accessed 25 January 2024.

4 This is one of a raft of measures in the election manifesto of the Kenya Kwanza coalition. The economic blueprint is known as the Bottom-Up Economic Transformation Plan 2022–2027. For a projection of its likely impact, see the Parliamentary Budget Office’s ‘Assessment of the Cost Implications of the Bottom-Up Economic Transformation Plan 2022-27’ <http://parliament.go.ke/sites/default/files/2022-11/ASSESSMENT%20OF%20THE%20COST%20IMPLICATIONS%20OF%20THE%20BOTTOM-UP%20ECONOMIC%20TRANSFORMATION%20PLAN%202022-2027.pdf> accessed 25 January 2024.

5 World Bank (n 1).

6 The Kenya Revenue Authority identifies such arrangements as one of the threats to tax revenue growth. To address this, KRA is set on a new information system that will enable it to process large data it receives from information exchange partners, to combat tax evasion.

7 Kenya’s territory was part of the East Africa Protectorate, until 1920 when it became a British Crown colony.

8 Kenya commemorates 1 June 1963, known as ‘Madaraka’ Day, as the day it attained internal self-rule. Kenya separately marks 12 December 1963, known as ‘Jamhuri Day’, as the day it achieved full independence from Britain.

9 Act No. 15 of 1963.

10 Estate Duty Act 2012, section 7.

11 The most recent revision was in 2012.

12 Emmanuel Saez and Gabriel Zucman ‘Progressive Wealth Taxation’ Brookings Papers on Economic Activity (2019) <https://www.brookings.edu/articles/progressive-wealth-taxation/> accessed 25 January 2024.

13 Ibid.

14 See for example Victor Thuronyi (ed), Tax Law Design and Drafting (International Monetary Fund 1996).

15 Ibid.

16 Organisation for Economic Co-operation and Development, ‘Inheritance Taxation in OECD Countries’ (OECD Tax Policy Studies No 28, 2021) <www.oecd.org/tax/tax-policy/inheritance-taxation-in-oecd-countries-e2879a7d-en.htm> accessed 21 July 2023.

17 Ministry of Planning and National Development ‘Economic Recovery Strategy for Wealth and Employment Creation’ (2003) <https://repository.kippra.or.ke/bitstream/handle/123456789/2059/Economic%20Recovery%20Strategy%20for%20Wealth%20and%20Employment%20Creation%202003%20-%202007.pdf?sequence=1&isAllowed=y> accessed 25 January 2024.

18 African Development Bank/Organisation for Economic Co-operation and Development, ‘African Economic Outlook 2004 – Kenya’ (2004) <https://web-archive.oecd.org/2012-06-15/156474-32429985.pdf> accessed 25 January, July 2024.

19 World Bank (n 1).

20 AfDB (n 3).

21 This constituted a rise from 68 per cent in 2021.

22 AfDB (n 3).

23 Non-traditional lenders refers to countries and institutions that have more recently become favoured sources of loans. This includes states like China which do not impose the same conditionalities as multilateral institutions and traditional lenders.

24 Equivalent to US$996 million.

25 Comments made by the IMF Deputy Managing Director and Acting Chair of the IMF executive board Antoinette Sayeh in Brian Ngugi, ‘IMF Backs Tax Hikes as it Okays Another Sh137b loan for Kenya’ The Standard (Nairobi, 19 July 2023) <www.standardmedia.co.ke/business/business/article/2001477512/imf-backs-tax-hikes-as-it-okays-another-sh137b-loan-for-kenya> accessed 25 January 2024.

26 AfDB (n 3).

27 See further the National Tax Policy and KRA’s Medium-Term Revenue Strategy.

28 The numbers largely increased after the KRA created an integrated and digitized tax system known as iTax.

29 Ksh 494.979 billion (approximately US$ 3.4 billion) personal income tax was collected, against a total revenue collection of Ksh 2.166 trillion (approximately US$ 15 billion).

30 Equivalent to approximately US$96 million.

31 The National Treasury introduced the proposed amendment through the Income Tax Bill 2018.

32 Equivalent to US$75,000.

33 Britah Omondi ‘Wealth Tax: A Solution to Inequality in Africa’ (Kenya Revenue Authority) <www.kra.go.ke/news-center/blog/1892-wealth-tax-a-solution-to-inequality-in-africa> accessed 25 January 2024. Public participation is extensively provided for in the Constitution of Kenya 2010. Specifically in relation to the process of legislating on financial matters, Article 118(1)(b), Article 201, Article 223 and Article 232 require Parliament to facilitate public participation.

34 Equivalent to approximately US$66,000.

35 Section 26 of the Finance Act 2023 amends the Third Schedule to the Income Tax Act to include this new tax band.

36 Equivalent to US$ 1.5 billion.

37 See for example concerns and alternative proposals by the Institute of Economic Affairs (IEA) <www.pd.co.ke/news/experts-fault-proposal-to-raise-tax-burden-for-highly-paid-workers-181868/> accessed 25 January 2024.

38 Opposition to the Finance Bill 2023 has come from multiple groups in the country, including local civil society organisations and the private business community. Most recently, on 19 July, the Kenya Conference of Catholic Bishops called on the government to repeal the Finance Act 2023 because of the cost of living crisis. See a report on the press conference held on 19 July <www.citizen.digital/news/catholic-bishops-want-president-ruto-to-repeal-finance-act-n323798> accessed 25 January 2024.

39 World Bank, ‘Kenya Economic Update, June 2023 – Securing Growth: Opportunities for Kenya in a Decarbonised World’ <https://openknowledge.worldbank.org/entities/publication/2bb75e31-86fb-4806-bac5-df72d5613258> accessed 25 January 2024.

40 The Raila Odinga led coalition formally rejected the results of the election following the official declaration of results by the Independent Electoral and Boundaries Commission (IEBC) on 15 August 2022 and filed a petition in the Supreme Court to have the election nullified. The petition was unsuccessful. The Supreme Court upheld the election results in its judgment on 5 September 2022. See Odinga & 16 others v Ruto & 10 others; Law Society of Kenya & 4 others (Amicus Curiae) (Presidential Election Petition E005, E001, E002, E003, E004, E007 & E008 of 2022 (Consolidated)) [2022] KESC 54 (KLR).

41 Official data from the Independent Electoral and Boundaries Commission (IEBC) indicate that Ruto garnered 50.5 per cent of the votes while Odinga garnered 48.8 per cent. The closeness in the election is based on the requirement for a presidential candidate to garner at least 50 per cent +1 of the votes cast in the election.

42 Maandamano is the Swahili word for ‘a procession’.

43 Selected days have ranged across different weeks.

44 ‘Saba Saba’ literally translated means ‘seven seven’ in reference to 7 July, when opposition leaders and civil society staged national protests against government. Saba Saba Day formally began with the 7 July 1990 protest and was subsequently commemorated after that year.

45 Social media platforms are a popular forum for political discussion, debate and argument for Kenyans. The most known cluster is the Kenyans on Twitter (KOT) assembly that has achieved notoriety in Kenya’s civic space.

46 The Kenya Private Sector Alliance (KEPSA) estimates the that the country’s private sector is losing an average of Ksh 3 billion (equivalent to US$ 20.6 million) a day due to the Maandamano protests.

47 In a joint statement dated 18 July and signed by Ambassadors and High Commissioners, thirteen foreign missions offered their support to the government and the official opposition ‘in their efforts to find constructive and peaceful solutions’. The group is led by the United Kingdom and also includes the United States, Canada, Australia, Netherlands, Finland, Germany, Ireland, Norway, Denmark, Sweden, Switzerland and Ukraine. See ‘Joint Statement by Ambassadors and High Commissioners in Kenya on Demonstrations’ <https://ke.usembassy.gov/joint-statement-by-embassies-and-high-commissions-in-kenya-on-demonstrations/> accessed on 25 January, July 2024.

48 The World Bank notes that Kenya’s real GDP growth in 2022 was 4.8 per cent, a slow-down from the 7.5 per cent recorded in 2021. It is of further concern that moderate growth in tax revenue is attributed to ‘subdued performance in economic activities’.

49 It is acknowledged that the rise in cost of living is only partly attributable to domestic conditions – a high debt burden and depressed economic output. Globally, rising prices have been noted since the start of the COVID-19 pandemic and further affected by the war in Ukraine. The AfDB’s Kenya Economic Outlook notes that through 2023, Kenya’s economy is likely to continue experiencing ‘the effects of a prolongment of Russia’s invasion of Ukraine on commodity prices, tight global financing, drought, and slow global economic recovery’. Nonetheless, the Central Bank of Kenya’s monetary policy committee continues to raise the interest rate to counter the effects of inflation and the rising cost of living.

50 The petition filed by Senator for Busia County, Omkiya Omtatah and the Azimio la Umoja-One Kenya coalition (the coalition whose presidential candidate finished second in the August 2022 election) is against the Cabinet Secretary for the National Treasury and Planning. The petition challenges the procedure followed in introducing and debating the Finance Bill 2023 in Parliament. It is alleged that the Speaker of the National Assembly violated Article 110(3) of the Constitution by introducing the Bill in the National Assembly before first determining whether its provisions affect the counties. It is further alleged that the Bill did not meet the public participation requirements in the Constitution, and that sections 28, 30, 33(xxx), 34(a)(iii), (v), (vii) & (viii), 36, 52, 56, 59, 73, 74, 76, 78, and 79 of the Finance Bill 2023 do not meet the constitutional limitations for imposition of taxes by government.

51 The Energy and Petroleum Regulatory Authority (EPRA) issued a press release on 30 June to this effect. The release confirmed the maximum pump prices that would be in force from 1 July which include VAT at 16 per cent.

52 Otiendo Amollo explains that revenue collection continues under the previous Finance Act. See Soko Directory Deam, ‘Finance Act 2023 Remains Suspended, High Court Tells Ruto’ Soko Directory (Nairobi, 10 July 2023) <https://sokodirectory.com/2023/07/finance-act-2023-remains-suspended-high-court-tells-ruto/> (accessed 25 January 2024).

53 CGT was set at 5 per cent by the Income Tax Act 2015, and increased to 15 per cent by an amendment through the Finance Act 2022.

54 Kaplan & Stratton Advocates, ‘Legal Alert – Capital Gains Increase’ (Kaplan & Stratton Newsletter, 5 January 2023) available at <www.kaplanstratton.com/capital-gains-tax-increase/> (accessed 25 January 2024). In Uganda, the rate is 30 per cent on business income, in Ethiopia a range of 15–30 per cent, and in Rwanda, a range of 5–30 per cent with the lower rate applying to the transfer of shares only.

55 Ibid.

56 Ibid.

57 See ‘Family Members Face New Tax on Inherited Property’ Business Daily (Nairobi, 14 October 2014) <www.businessdailyafrica.com/bd/markets/family-members-face-new-tax-on-inherited-property-2070342> (accessed 25 January, July 2024).

58 Omondi (n 33).

59 Ibid.

60 Ibid. Equivalent to US$862 million.

61 New World Wealth and Henley & Partners, ‘Africa Wealth Report 2022’ (5 June 2022) <www.henleyglobal.com/publications/africa-wealth-report-2022> accessed 25 January 2024.

62 Emmanuel Saez, ‘Taxing of the Wealthy in Developing Countries’ <https://thedocs.worldbank.org/en/doc/679eb8cec4db1990bd93aa83c32696a6-0090072021/original/Presentation-Emmanuel-Saez.pdf> accessed 25 January 2024.

63 Omondi (n 33).

64 The obvious pitfall here being that wealth can be moved abroad to more tax friendly jurisdictions.

65 Saez and Zucman (n 12).

66 Omondi (n 33).

67 New World Wealth and Henley & Partners (n 61).

68 John Braithwaite, ‘Responsive Regulation and Developing Economies’ (2006) 34(5) World Development 884.

69 Ibid, 884–885.

70 Ibid, 886.

71 Ibid, 885.

72 See for example The Institute for Social Accountability (TISA), ‘Taxing the Wealthy: A Potential Source of Revenue in Kenya’ (2022) <https://www.talkafrica.co.ke/taxing-the-wealthy-a-potential-source-of-revenue-in-kenya/> accessed 25 January 2024.

73 Braithwaite (n 68); Richard Goode, Government Finance in Developing Countries (Brookings Institution Press 1984).

74 Valerie Braithwaite ‘Responsive Regulation and Taxation’ (2007) 29(1) Law & Policy 3.

75 Ibid, 4.

76 Ibid.

77 Ibid.

78 Ibid, 4.

79 Ibid, 6.

80 Prior to 2002, the nature of one-party or authority rule during the Kenyatta and Moi regimes meant that little space existed for opposition and citizen resistance to government policies.

81 Brathwaite (n 74).

82 William Maema, ‘The Era of Trust Fund Babies is Here’ Business Daily (Nairobi, 22 June 2023) <www.businessdailyafrica.com/bd/opinion-analysis/columnists/the-era-of-trust-fund-babies-finally-is-here-4278728> accessed 25 January 2024.

83 Braithwaite (n 68).

84 Maema (n 82).

85 Cases include those of the estates of two well-known businessmen, Gerishon Kirima and Njenga Karume. See Jane Gathoni Kirima & another v Anne Wangari Kirima & another; Stephen Kamau Kirima & 10 others (Interested Parties) [2022] eKLR and Albert Kigera Karume & 2 others v George Ngugi Waireri & 3 others (sued as Trustees of the Njenga Karume Trust & another; Grace Njoki Njenga Karume & 7 others (Interested Parties) [2020] eKLR.

86 OECD (n 16).

87 Ibid.

88 Maema (n 82).

89 Ibid.

90 OECD (n 16).

91 New World Wealth and Henley & Partners (n 61).

92 Developing countries are advised to assess their ‘administrative capacity’ when assessing the appropriateness of fiscal policies, Thuronyi (n 14).

93 Braithwaite 5 (n 74).