Court decision to delay ruling on incentives case raises eyebrows

The battle over the government’s tax incentives to a manufacturer has taken a new twist, with the court deferring its ruling on whether to lift the orders issued in September 2024.

These orders, which were made by High Court Judge Bahati Mwamuye, halted the implementation of a 2019 Special Operating Framework Arrangement (SOFA) agreement between the Treasury and Blue Nile Rolling Mills Limited.

The judge deferred the ruling again on November 19, 2024, and then a second time on December 18, 2024, following revelations that Blue Nile had not been informed that the parties, James Magare and William Masengo, had filed another similar case before the Commercial Court.

During the December hearing, Blue Nile’s lawyer, Ahmednasir Abdullahi, argued that there was an issue of forum shopping, as Bwire, the lawyer for Magare and Masengo, had filed the case in another court before moving it to Judge Mwamuye’s court. Abdullahi claimed that Bwire had initially filed the case with Judge Freda Mugambi, but failed to obtain orders, prompting him to withdraw the case before approaching Judge Mwamuye’s court.

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Bwire responded, explaining that the filing in the Commercial Court had been accidental. He claimed that the petition, which was intended to enforce human rights, had been mistakenly filed in the wrong court division. Bwire further explained that they were informed by the Milimani Court’s registry of the error and were advised to withdraw the case immediately. According to Bwire, they realised the mistake within a short window of time (10 minutes), and the case was swiftly withdrawn.

Blue Nile had applied for SOFA on September 28, 2019, and the agreement was signed four months later, with the Finance Act 2018 serving as the operational law. The firm argued that the SOFA’s shared objective was to promote investment and economic growth in Kenya.

It was a 100 per cent import substitution project, meaning that the company would manufacture goods locally that were previously imported. The government estimated that this arrangement would save the country at least US$15 million (Sh1.5 billion) in foreign currency annually.

As part of the agreement, the government promised the company a five-year income tax exemption and a further 10-year exemption from the Import Declaration Form (IDF) and Road Development Levy (RDL). Under normal circumstances, manufacturers are charged a 1.5 per cent IDF and 1.5 per cent on raw materials. Moreover, the government agreed to impose a 10 per cent corporate tax on Blue Nile during the first five years of the agreement.

However, in 2021, the government altered the terms of the SOFA through the Finance Act 2021, introducing a transitional clause that continued the original agreement. Then, when the Kenya Kwanza administration took power, it introduced a new condition requiring companies to make a Sh10 billion investment to qualify for SOFA under the Finance Act 2022.

Advisories from the Attorney General’s office had cautioned that the government could not simply walk away from its first agreement with Blue Nile.

According to the AG, the initial SOFA created a legitimate expectation for the investor, who could reasonably expect that their business would be protected from sudden changes in the taxation regime.

Blue Nile argued that the government’s actions would lead to massive losses for the company, which could result in the closure of its business.

In court, KRA and the Attorney General supported Blue Nile’s position, arguing that the SOFA was legally grounded in the Finance Act 2018 and had passed the necessary public participation requirements.

KRA also pointed out that Magare and Masengo had not shown any evidence of how they would suffer losses if the court did not set aside the orders. The next hearing on March 18, will be crucial in determining whether the government can continue with the changes to the agreement or whether the initial terms should remain in force.