Kenya’s burgeoning carbon credit market is facing a "regulatory fog" as top legal minds demand urgent clarity on the taxation regime that threatens to stifle the multi-billion shilling sector.

Following a landmark ruling by the Tax Appeals Tribunal involving Wildlife Works Sanctuary Ltd, lawyers warn that the Kenya Revenue Authority (KRA) is moving aggressively to tax carbon revenues without a clear, predictable framework. The uncertainty risks spooking foreign investors just as Kenya positions itself as Africa’s carbon trading hub.

The Taxman Cometh

The core dispute revolves around whether carbon credits should be treated as goods, services, or intangibles—each attracting different tax liabilities. "Investors need certainty, not surprises," argued Alex Kanyi, a tax partner, noting that the KRA's current approach relies on "source-based" taxation principles that may not align with global best practices for this novel asset class.

The Tribunal’s ruling reinforced that income generated from carbon credits within Kenya is taxable locally, even if sold abroad. However, the lack of specific guidelines in the Finance Act on *how* to calculate these taxes—especially regarding the deductibility of community social contributions—has created a minefield for project developers.

• The Community Cut: Regulations mandate that 40% of earnings from land-based projects must go to the community. Developers are asking: Is this 40% tax-deductible expense, or is KRA taxing the gross revenue? The answer could mean the difference between profit and bankruptcy.
• Global Competitiveness: Lawyers warn that if Kenya’s tax regime is perceived as punitive or unpredictable, capital will simply flow to Tanzania or Uganda. "Carbon credits are a mobile asset," one analyst noted. "You cannot tax them like coffee beans."

Policy vs. Reality

The government’s Medium-Term Revenue Strategy (2024-2027) hints at a future "carbon tax" on polluters, but for now, the focus is on taxing the *earners* of credits. This misalignment is causing friction. Legal experts are calling for a dedicated "Carbon Tax Code" to harmonize the Climate Change Act with the Income Tax Act.

As the sector waits for the "whitelist" of approved technologies under Article 6 of the Paris Agreement, the message to the Treasury is clear: Clarity is the best incentive. Without it, Kenya’s green gold might just remain buried.