Misort Africa Wins KSh3.9 Billion Tax Battle Against KRA Over Treasury Data Centre Award

Tribunal rejects KRA’s bid to tax Misort Africa’s massive government compensation award, ruling that lost profits were compensation for destroyed contractual rights.

A bitter tax dispute surrounding a troubled government data centre has taken another dramatic turn.

The Tax Appeals Tribunal has rejected KRA’s attempt to tax Misort Africa Limited on KSh3.93 billion.

The ruling effectively removes a corporation tax assessment arising from a KSh700 million payment.

It also draws a crucial distinction between taxable business profits and compensation for destroyed contractual rights.

The dispute traces back to a government project awarded more than 17 years ago.

In August 2009, Treasury contracted Misort Africa to construct a Disaster Data Recovery Centre in Naivasha.

The original contract was worth KSh782.5 million, with the facility intended to strengthen government data resilience.

What began as an ambitious technology project eventually became a prolonged contractual and financial battle.

Contract Unravels

Disagreements later emerged over the project’s scope, implementation and eventual completion.

The parties subsequently structured the works into different phases as project requirements changed.

Misort maintained that the original agreement covered the entire project, including subsequent construction works.

Treasury later argued that Phase Three required a fresh procurement process under government procurement rules.

That disagreement eventually became central to the arbitration proceedings between the contractor and government.

On August 3, 2021, the arbitrator found that Treasury had repudiated the contract.

He awarded Misort KSh3.68 billion for lost profits, alongside several additional amounts.

These included KSh167.75 million for idle resources and KSh25.79 million in retention.

Another KSh57.44 million covered arbitration and legal costs incurred during the dispute.

Treasury challenged the award before the High Court, disputing the legal basis for Phase Three.

The High Court nevertheless recognised the arbitral award and ordered its enforcement against Treasury.

The court found that the original contract covered completion of the entire project.

It also found that Treasury had failed to demonstrate a separate contract existed for Phase Three.

Tax Fight

The dispute later acquired another dimension when KRA turned its attention to the compensation award.

Treasury paid Misort KSh700 million during 2024 as part settlement of the outstanding award.

Misort declared the payment in its tax return, but KRA subsequently challenged its tax treatment.

The revenue authority treated the compensation as taxable business income under the Income Tax Act.

KRA consequently assessed corporation tax, penalties and interest against the contractor.

Misort rejected the assessment and challenged the taxman’s decision before the Tribunal.

KRA argued that compensation should assume the character of what it replaced.

That reasoning is commonly known in tax law as the surrogatum principle.

The authority argued that the KSh3.68 billion replaced profits Misort would have earned from performing Phase Three.

Misort countered that the payment compensated it for losing the contractual framework itself.

That distinction eventually became the central question before the Tribunal.

The Tribunal rejected KRA’s argument that calling the award “loss of profits” automatically made it taxable.

Instead, the Tribunal examined what the compensation actually replaced.

It found that the underlying contract created the framework through which future revenues could arise.

Treasury’s repudiation destroyed that contractual framework before Phase Three could commence.

Misort therefore never performed the disputed works or earned ordinary trading receipts from them.

Billions Escape Tax

The Tribunal consequently found the KSh3.68 billion compensation capital rather than revenue in character.

It noted that projected profits merely provided the method used to calculate the damages.

That calculation method did not determine the ultimate tax character of the compensation.

“The heads under which the Arbitrator assessed compensation describe the manner in which he measured that loss,” the Tribunal said.

“They do not alter its legal character.”

The ruling also dealt with the KSh167.75 million awarded for idle resources.

The arbitrator had found that Misort remained responsible for the site for several years.

During that period, the contractor incurred security, utility and other overhead expenses.

The Tribunal found that the compensation reimbursed the expenses incurred due to Treasury’s repudiation.

KRA had also failed to demonstrate that Misort previously deducted those expenses for tax purposes.

The Tribunal therefore found no basis for treating the reimbursement as taxable business income.

The KSh57.44 million arbitration and legal costs suffered a similar fate before the Tribunal.

Those costs represented expenses Misort incurred while pursuing its contractual rights against Treasury.

KRA had not established that Misort previously deducted the reimbursed expenses from taxable income.

The Tribunal consequently found that taxing the reimbursement was unjustified.

The KSh25.79 million retention presented another problem for the revenue authority.

The Tribunal agreed that retention represented deferred payment for work already completed and invoiced.

However, Misort Africa had already recognised the underlying Phase One revenue in its accounts.

Taxing the retention again during 2024 would therefore amount to taxing the same income twice.

The Tribunal consequently excluded that amount from the 2024 corporation tax assessment.

Interest Unsettled

The Tribunal also considered interest accruing on the outstanding arbitration award.

The arbitrator had imposed 12% simple interest from the award date until full payment.

However, KRA’s own schedule showed that the interest remained “to be computed”.

The Tribunal therefore found that KRA’s determination concerning the interest was premature.

It nevertheless left room for future taxation once the interest becomes properly ascertained.

Any such assessment must correspond with the year when the interest accrues or becomes payable.

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The Tribunal therefore did not create a blanket exemption for future interest receipts.

In the end, the Tribunal allowed Misort’s appeal and set aside KRA’s March 6, 2026, decision.

Each party was ordered to bear its own costs, bringing another chapter to the long-running dispute.

The ruling reinforces one central principle about compensation and taxation.

A payment does not become taxable simply because an arbitrator calculates it using projected profits.

Its tax character depends on the loss or entitlement that the payment actually replaces.

For Misort Africa, that distinction has potentially saved billions from an immediate corporation tax claim.

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