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Tax Evasion, Tax Avoidance and the Myth of the Magic Label

Matrix style meme: a KRA officer aims at a figure dodging bullets and asks, that's surely illegal, right

Someone restructures, moves a loan or claims an incentive, pays less tax, and a revenue officer squints at the file.

Ask around and you will hear the debate pulled in different directions at once. Some say evasion and avoidance are both against the rules. Others point out that the courts do not always read the law the way KRA does. And plenty quietly rebrand avoidance as "tax planning", or "aggressive tax planning" when they are feeling brave.

That argument captures a real tension. The law, however, draws three different lines: evasion, avoidance that can be counteracted, and planning the law actually permits.

Evasion: Not Dodging the Bullet, Hiding It in Your Pocket

Tax evasion is lying about the facts. The income existed but never reached the return, or the expense never happened but reached the books.

Take a purely hypothetical hardware shop in Kisii. The owner, call him Otieno, runs half his sales through an "unofficial" M-Pesa till and keeps one set of books for KRA and a truthful set for himself. That is not planning. That is the conduct the Tax Procedures Act (Cap. 469B) describes in section 97 under the heading "Fraud in relation to tax": knowingly omitting from a return an amount that should have been included, making an incorrect statement affecting liability, or preparing false books.

The consequences are not subtle. On conviction under section 97, section 104(3) provides a fine not exceeding KSh 10 million or double the tax evaded, whichever is higher, or imprisonment of up to ten years, or both. Separately, section 84 imposes a civil tax shortfall penalty of 75% of the shortfall where a false statement or omission was made deliberately. And under section 31(4)(a), an assessment may be amended at any time in a case of "gross or wilful neglect, evasion, or fraud". The ordinary amendment period is generally five years, but the Act removes that limit in cases of gross or wilful neglect, evasion or fraud.

So evasion is not a grey area. Proven, it is a crime.

Avoidance: Bending Like Neo, But Inside Whose Matrix?

Avoidance is different. Nobody hides the facts. The transactions are real and the returns are filed. The question is whether the arrangement was designed to get a tax result Parliament did not intend.

The Tax Procedures Act defines "tax avoidance" in section 3 as "a transaction or a scheme designed to avoid liability to pay tax under any tax law". And section 85 bites hard: where the Commissioner has applied a tax avoidance provision, the taxpayer is liable to a tax avoidance penalty "equal to double the amount of the tax that would have been avoided".

Double. Not a slap on the wrist. A kick in the shins.

A blog on KRA's own website, "Tax Avoidance and Tax Evasion: A Tale of Two Errors", concludes from that definition and the double penalty that this "makes engaging in any tax avoidance scheme in Kenya, an offence and therefore illegal".

With respect, that overstates it. Section 85 is an administrative penalty, triggered when the Commissioner applies a tax avoidance provision in an assessment. It is a civil consequence, not a criminal charge. The Act does create one avoidance offence, aimed at advisers: under section 92(c), a tax agent commits an offence where the agent "assists a taxpayer to create a tax avoidance scheme". Tax consultants, kindly read that one twice.

So, more accurately: when KRA successfully counteracts an avoidance scheme, the tax is restored as if the scheme never happened, and the penalty of double that tax comes on top of it. That is a long way from "legal, just call it planning", but it is not fraud either.

The Rulebook Changed on 1^st July 2026

For decades the anti avoidance workhorse was section 23 of the Income Tax Act (Cap. 470). It allowed the Commissioner, where he was of the opinion that "the main purpose or one of the main purposes" of a transaction was the avoidance or reduction of tax, to make such adjustments as he considered just and reasonable to counteract it.

The Finance Act, 2026 (Act No. 19 of 2026) repealed section 23 outright (section 15), and inserted a new section 18A, "Tax avoidance schemes", into the Tax Procedures Act (section 42). Both took effect on 1^st July 2026.

Section 18A(1) applies where the Commissioner determines, on the information listed in subsection (2), that (a) "a person has entered into or carried out a tax avoidance scheme"; (b) "a person has obtained a tax benefit in connection with the scheme"; and (c) "the purpose of enabling the person referred to in paragraph (b) is to obtain a tax benefit". The Commissioner may then determine the liability of the person who obtained the benefit "as if the scheme had not been entered into or carried out". A "scheme" includes any course of action, arrangement or plan, "whether or not legally enforceable", and a "tax benefit" includes a reduced liability, a refund or a postponement of tax.

There are guard rails: the assessment must issue within five years of the end of the tax period, written reasons must follow within thirty days, and a taxpayer may seek a private ruling on complex transactions.

Two honest caveats. Paragraph (c) needs careful reading alongside the other statutory conditions; the application of the new provision will depend on the facts and judicial interpretation. And transactions from before 1^st July 2026 raise transitional questions about which regime applies. Neither should be guessed at on a napkin.

What the Courts Have Actually Said

Do the courts side with KRA or with taxpayers? The cases show something more useful. Courts and the Tribunal do not pick sides. They pick statutes and evidence.

1. Primarosa Flowers Limited v Commissioner of Income Tax [2017] KEHC 10095 (KLR). A flower exporter borrowed from its offshore parent, later signed a new agreement with no interest provision, and paid no interest during the audit period. KRA invoked section 23 with the withholding tax provisions, and the Tribunal agreed. The High Court (Sewe J) allowed the taxpayer's appeal, holding that withholding tax under section 35(1) arises upon payment, and the power to deem interest only came with the Finance Act, 2011. The Court did not pretend the structure was innocent. At paragraph 42: "It could very well be, as was found by the Tribunal, that the Appellant and its holding Company were out to avoid the payment of tax, given the nature of their agreement; nevertheless, in the absence of a deeming provision ... it was not open for the Respondent to require the payment of withholding tax under Section 35(1) of the Income Tax Act in the absence of proof of payment of interest." Lesson: suspicion of avoidance is not a charging provision.

2. Izwe Loans Kenya Limited v Commissioner of Domestic Taxes [2023] KETAT 501. Here the Tax Appeals Tribunal went the other way. A lender funded by Mauritian related parties inserted a Kenyan holding company, taking itself outside the then thin capitalisation restriction on interest. The fatal exhibit was its own board minute discussing thin capitalisation and a consultant's recommendation to form the holding company. The Tribunal found at paragraph 166 that "one of the main purposes of the restructuring was reduction of its tax liability", and upheld the use of section 23 to restrict the interest. It still corrected KRA on interest owed to genuine resident lenders, so the appeal partly succeeded. Lesson: KRA wins when the evidence is there, and sometimes the taxpayer writes it.

3. Republic v Kenya Revenue Authority ex parte Majid Al Futtaim Hypermarkets Limited [2020] KEHC 1216 (KLR). A customs dispute in which KRA had expressly approved the importer's classification, then demanded more duty. The High Court (Nyamweya J) quashed the demand as unreasonable, observing at paragraph 111 that "there is a difference between tax evasion and arranging one’s affairs so as to reduce one’s tax liability within the limits of the law", and that "tax planning which involves the legal and reasonable use of available exemptions and reliefs should be distinguished from aggressive tax avoidance involving artificial schemes and transactions." That passage supports rather than decides the case, but it is the clearest local statement of the three way distinction.

4. Commissioner of Domestic Taxes v CKL Africa Limited [2023] KEHC 17270 (KLR). The tame cousin. A manufacturer claimed a 150% investment deduction on a factory and KRA disputed the year of first use. The High Court (Mugambi J) upheld the deduction, noting at paragraph 25: "Had the legislature intended to prescribe other requirements, this would have been expressly stated in the law." Claiming an incentive exactly as Parliament designed it is not avoidance. It is the law working.

Three Lines, Not One

Evasion is a crime once proven. Knowingly hiding income or inventing expenses is fraud territory.

Avoidance that KRA successfully counteracts does not work: the tax is restored and a double penalty follows. For the taxpayer that is a civil consequence, while the adviser who helps create the scheme faces a criminal provision. And KRA does not always win: Primarosa shows the courts insisting on a provision and proof, while Izwe shows the Tribunal backing KRA when the evidence is there.

Planning is using the law as Parliament designed it. The label on the file decides nothing; section 18A looks at the scheme, the benefit and the purpose. An investment deduction claimed as the law intends is planning, whatever you call it. A circular loan with no commercial reason invites section 18A scrutiny, even if the engagement letter says "strategic tax optimisation."

So How Do You Bend Without Breaking?

Lead with commerce, not tax. If the only reason for a step is the tax result, expect questions.
Mind your minutes. In Izwe a board minute became Exhibit A. Record the genuine business reasons accurately.
Read the charging provision first. Primarosa won because the charge did not reach the facts.
Use the private ruling route under section 18A(5) for complex transactions before you commit.
Never falsify the facts. Knowingly hiding income or inventing expenses can bring the criminal fraud provisions into play; an honest mistake is not automatically fraud.

This article is general information, not legal or tax advice. The law stated is as at 7^th November 2026. Speak to an advocate or tax professional about your specific circumstances.

By Benjamin Manani, Ben Manani & Co. Advocates.

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