Taxation of Aid Funded Projects in Kenya: Law, Policy, Problems and Proposals for Reform

Abstract

Foreign aid contributes largely to the development expenditure of developing countries. Tax treatment of foreign aid has been a subject of discussion in the global and regional arena. The United Nations Committee of Experts on International Cooperation on Tax Matters and the African Tax Administration Forum have in their past sessions and publications advocated for a coherent policy on the treatment of taxes in aid funded projects (AFPs). Kenya’s tax legal regime provides for several tax exemptions for AFPs. Tax exemptions as a form of tax expenditure has its merits and demerits hence there is need for their evaluation as to their cost and benefit before they are granted. Tax treatment of AFPs requires a comprehensive and clear policy and legal framework to avoid tax disputes. In Kenya, this has been a challenge. Based on primary and secondary data, this research interrogates the nature of the problems in tax treatment of AFPs, the adequacy of the existing policy and legal framework, the effects of the problems and makes recommendations.