Case Study:Rafiki Micro-Finance Bank Limited v Commissioner of Legal Services and Board Co-ordination (Tax Appeal E394 of 2025) [2026] KETAT 68 (KLR) (26 March 2026) (Judgment)
The Dispute in Brief
The dispute originated from KRA’s issuance of a debt demand letter to Rafiki Microfinance Bank on 22 August 2024, indicating outstanding tax liabilities of Kshs 1.37 billion across corporate income tax, withholding tax, PAYE, and excise duty for the 2015 and 2018 financial years. Most of these issues were eventually resolved by a partial consent adopted by the Tribunal on 4 February 2026.
What remained was the core question: whether suspended interest and suspended penalties on non‑performing loans should be subject to income tax. The amounts in dispute were Kshs 47,857,230 in suspended interest and Kshs 159,760,227 in suspended penalties—a total principal tax liability of Kshs 207.6 million.
The Parties’ Arguments
Rafiki’s Position
The Appellant argued that interest on defaulted loans should not be taxed as income because it is not yet realised. It maintained that such amounts are held in suspense accounts in accordance with Regulation 48 of the Microfinance (Deposit‑Taking Microfinance Institutions) Regulations, 2008, which explicitly states that “the interest in suspense shall not be treated as income”. The bank further contended that suspended interest is only recognised as income upon actual receipt in cash, and that taxing it upfront would amount to double taxation when recovered amounts are later taxed.
KRA’s Position
The Respondent contended that Kenya’s Income Tax Act adopts an accrual basis of taxation, not a cash basis. Under Section 3 of the Income Tax Act, income is taxed when the legal right to receive it arises and the amount can be determined with reasonable certainty—not necessarily when cash is received. KRA further argued that the Appellant had misclassified the loans as non‑performing and had improperly suspended the accrued interest and penalties.
The Tribunal’s Ruling: A Matter of Evidence, Not Accounting
The Tribunal’s found that the case hinged on evidence rather than accounting principles, and that Rafiki had failed to discharge its statutorily mandated burden of proof.
Under Section 56(1) of the Tax Procedures Act, the burden shall be on the taxpayer to prove that a tax decision is incorrect. Section 30 of the Tax Appeals Tribunal Act reinforces this position, requiring an appellant to prove that an assessment is excessive or that a tax decision should not have been made.
The Tribunal observed:
“The appellant failed to present evidentiary information demonstrating how it concluded that the loans justifying the suspension of interest and penalties were classified as non‑performing. This is the crux of the dispute.”
And further:
“The appellant failed to discharge its statutorily mandated burden of proving that the decision by the respondent to confirm the income tax assessment on suspended interest and suspended penalty amounting to Kshs 47.8 million and Kshs 159.7 million was incorrect.”
The Tribunal acknowledged that financial institutions must suspend interest on non‑performing loans under CBK regulations, but it stressed that taxpayers must prove compliance. Rafiki relied on general explanations, witness testimony, and regulatory frameworks, but failed to provide specific documents linking the disputed amounts to properly classified non‑performing loans. Assertions alone were insufficient.
The Tribunal accordingly dismissed the remainder of the appeal and upheld the assessments.
Conclusion
Rafiki Microfinance Bank Limited v Commissioner of Legal Services and Board Co‑ordination stands as a cautionary tale. It is not a case about whether suspended interest should ever be taxed—the Tribunal left that substantive question largely untouched. It is a case about what happens when a taxpayer fails to prove its own case.
