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2005 E. Afr. L.J. 92 (2005)
An Analysis of Section 4A of the Kenyan Income Tax Act, Hedging and Foreign Exchange Losses and Gains

handle is hein.journals/easfrilaj2005 and id is 99 raw text is: East African Law Journal Vol 2 2005 AN ANALYSIS OF SECTION 4A OF THE KENYAN INCOME TAX ACT, HEDGING AND FOREIGN EXCHANGE LOSSES AND GAINS Attiya Waris' I. INTRODUCTION The one major drive in government policy in most developing countries, Kenya being no exception, has been to increase foreign direct investment. However, the need to provie a suitable tax system as a concomitant to this drive is one that has been only partially addressed. This apparent omission is the central concern of this paper. Whereas administration of tax law is improving countrywide, the legislation that supports the tax system remains predominantly the same. As part of the international drive towards globalisation, liberalisation of the economy and in order to encourage cross-border trading, Kenya's foreign exchange law was changed. Kenya unblocked' its currency by revocation of the Exchange Control Act2 thus allowing for liberalised holding, using and trading in foreign exchange. This has in turn resulted in the opening of foreign exchange accounts by many companies in Kenyan banks which was finally allowed through amendment and finally withdrawal of the foreign exchange regulations. However, despite the revocation of some legislation, the foreign exchange provisions of the Kenyan Income Tax Act3 have remained exactly the same. The problem that this paper will grapple with is to analyse section 4A of the Income Tax Act of Kenya. This is the only section that discusses the taxation of foreign exchange losses and gains. Foreign exchange is treated very differently from profits or losses from the conduct of business. When a business in one country undertakes any form of transaction with another business in another country, the result is the need to convert one form of currency into another. The problem arises due to the difference in the rate of exchange between the times when first, the contract is negotiated; secondly, the money changed from one currency to another, thirdly, when the money is exchanged or remitted as payment and finally when the money is received. For some countries this may not be a problem as their currencies are fairly stable and do not change greatly but developing countries have a consistent problem due to fluctuation of currency. It is the tax law and accounting treatment of the foreign exchange loss or gain that concerns this article. There are many diverse methods of treating foreign exchange losses and gains but the underlying principle in their treatment is that a loss Assistant Lecturer, School of Law, University of Nairobi. IA blocked currency is one that is not freely convertible to other currencies due to exchange controls. 2 Chapter 113 of the Laws of Kenya. In December 1995 the Exchange Control Act was repealed in its entirety. 3 Chapter 470 of the Laws of Kenya. 92

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