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TAXATIONOFILLEGALINCOMESHOULDITBETAXEDIFSOHOWSHOULD

ITBETAXED,SOASTOAVAOIDISSUESONSELFINCRIMINATION?
AD100150
INTRODUCTION
Itisclearthatincomereceivedissubjecttotaxnotwithstandingthefactthatitis
tainted with illegality or is received from illegal activities, Malan J 1. The Kenyan
jurisdiction,ontaxationseemstoagreewiththisremarkmoreso;theregimeontaxation
initsentiretydoesnotdefinewhatlegalincomeisorillegalincomeonthesame.
Therehavebeencontentiousissuesastotheprovisiononremittancemechanismson
theapplicationoftaxonsuchincomes.ThecontentiousissuesarisewiththeKenyanTax
remittancesystemsoveremphasisonthesourcesofsuchincome.Thisthenexposesthe
taxpayertoselfincrimination,whichisagainsthis/herconstitutionalright.2
Thefollowingpaperthereforewillfirstlydefinewhatabusinessisandthereafteron
thesamewhatkindsofbusinessaretaxableinKenya.Itwillalsodefineillegalincome
alongsidethedefinitionofabusiness.ItwillalsolookattheConstitutionalmakeupon
selfincriminationandifcertainrightscanalsobesupplantedagainsttherightonself
incriminationsoastoprotectsuchataxpayer.Itwillalsooutlineabriefcomparative
analysisonotherjurisdictionwhosetaxsystemhaveprovidedforthetaxationofsuch
income..
Mostimportantlyandfinallyitwouldconcludedontherightersopinionasperthe
analysis on if illegal income should be taxed and the mechanisms that should be
1

JohannesburgTaxCourtjudgmentinTaxCaseIT11282,referringtovariousjudicialdecisionstosupportthis

conclusion.

2 Article 50(l) Constitution of Kenya 2010

employedtotaxsuchincome,notforgettingConstitutionalissuesonselfincrimination
anddisclosureofinformation.
WHATISTAXABLE?
TheIncomeAct,doesnotdefinewhatanincomeis,butithoweverillustrates
factors upon which such income is taxed, this is to mean that the sources of which
incomeistaxedwhichitlistsandillustratesinSection3. Inlightofthiscontention,
incomeisproperlyderivedfromaformofserviceorbusiness,abusinessthereforecanbe
categoricallybeingasaformoftrade,oranynonprofitmakingventureinwhichservices
arerenderedforprofitoraformofexchange.3
Section3oftheAct,illustratesthatincomeischargedonthegainsandprofitsofa
business.Section2onthesamedefinesabusinessasfollows,asincludinganytrade,
professionorvocationadventureandconcerninthenatureoftrade,butdoesnotinclude
employment.
Doesillegalincomefallintheambitofthisdefinitionandcanwequalifyany
proceedsfromillegalactivityasconverselybeingpartofaprofitmakingventureor
vocation?Thisquestionisthentackledinthepresidingparagraphs.
WHATISILLEGALINCOME?
Webeginfirstlytodivulgeintotheissueonwhatqualifiessourcesofprofitas
beinglegal,thiscanbeclearlyderivedfromthedefinitionofabusinessasderivedform
the Act previously defined. We can assume to state clearly that all income from a
vocationatradeandadventurenotincludingemploymentislegalincomeandtherefore
canbeexposedtoachargeoftaxation.Whatthenisillegalincome?Thisisbasically
3 Section2IncomeTaxActKenya

incomefromillegalacts4TheActdoesnotdefinewhatlegalincomeisbuthoweverfrom
thepreviousdiscussionwecansafelystatethatitisthoseactivitiesthatfallwithinthe
definitionofabusinessexcludingofcourseemployment,uponwhosederivativessuch
incomeisqualifiedaslegal,andthereforetaxable.
Illegalincomeisgeneratedfromunscrupulousgainssuchasgenerationofprofits
from the sale of stolen goods, corrupt dealings, and profits made from the sale of
narcotics.Cansuchincomesthenbetaxable?Generallyabusinessisaformoftradein
whichagainismade.Illegalactivitiesirrespectiveofthembeingtaintedofillegalitydo
generateaprofitandthereforeandincome.Thechallengethenliesonremittingsuch
incomes;inKenyathesourceofsuchincomeshavetobedisclosedsoastoimputethe
differenttaxbasestobeappliedhenceforth.Sayforexampleemploymentincome,during
remittance one must declare that such income was as a result of employment and
thereforeitisapplieddifferentlyfromallotherincomes.Italsofollowsthatprofitsand
gains are treated the same where upon realization, Corporation tax in the case of a
corporationissubjected.
Thedeclarationonsuchamountsisparamountnotonlyfortabulationandeconomic
analysisbutalsoforthetaxpayerthis falls inlinewiththeprincipleofcertaintyand
overalldisclosureonthesourceofsuchincomefortaxliabilitypurposes,andtherefore
createsanoptimaltaxsystem.Howthenwouldataxpayerdisclosesourcesofincome
fromillegalactivities?Thisisaddressedunderthefollowingheading.

Examplesofillegalincomeincludeincomefromtheftanddrugdealing.IllegalincomeistaxedintheUnitedStatesasifitwere
ordinaryincome.Interestingly,expensesoneincursintheconductofanillegalactivity(otherthandrugtrafficking)maybetax
deductible.Forexample,theIRSAccessedJune14,2016< http://financialdictionary.thefreedictionary.com/Illegal+Income>

DISCLOSUREONTHESOURCESOFILLEGALINCOMEMAYRESULTTO
SELFINCRIMINATION.
Selfincriminationfirstlyistheactofexposingoneselfgenerally,bymakingastatement
"toanaccusationorchargeofcrime;toinvolveoneselforanother[person]inacriminal
prosecutionorthedangerthereof.5Intheparlanceofbusinessefficacythereisthenotion
thatwheneverabusinessoranindividualapproachesaninvestor,thereisthenotionthat
hemustproceedtoprovideastatementofhis/heraffairs.Affairsinthiscontextconnote,
his/herfinancialandgeneralworth.Justliketaxation,uponremittanceotherthanforthe
purpose previously outlined the source of such income should be declared unless
providedforotherwise,asotherjurisdictionsimputethiswillbeillustrated.
Inconnectionthereforetoselfincrimination,thedefinitionstipulatesthe
makingofstatements canbeseenasdisclosureofonesaffairsspecificallyfinancial
affairs,inthiscontext.Statementscanalsobedocumentsinthiscasedocumentsshowing
financialpositionofacertainventure.
Conversely,forthesakeofTaxationinKenyasourcesofincomemustbe
declared.Howthenwouldanindividualknowinglydeclarehissourceofincomeforthe
sakeoftaxationincaseswheretaxationofillegalincomeisadmissible? Theissueof
selfincriminationhasbeendealtwithinotherjurisdictionasfollows.IntheUnitedStates
forinstance,pleadingthefifthwhichbasicallyillustratestherighttorefusetoanswer

Black's Law Dictionary (5th ed.). 1979. p690

questionbothduringcustodyandduringcourtproceedings.WhereoneclaimstostateI
pleadthefifth.ThisisaConstitutionalRight,andthereforeisinalienable.
TheKenyananalogyonthesameisexhibitedinArticle50(l)readtogetherwith
Article49oftheconstitutionofKenya2010,whichconfersthatapersonhasarightto
remainsilent,thisthensignifiesthemirroranalogyoftheAmericanfifthAmendmentas
illustratedearlier.Weshouldnotethatthisrightisnotabsoluteandthereforesucharight
canbelimited6,butneverthelessshouldbesafeguarded.7 Disclosurethereforeonthe
sourcesofsuchincomewouldsubjectanindividualtoselfincrimination.
HOWTHENCANSUCHINCOMESBESUBJECTEDTOTHECONTRAINTS
OFTAXATION?
Kenyaismadeupofafaadeofmeanstowhichpeoplesurviveandearnaliving
unfortunatelymostofsuchmeansemitsummarilyillegalincome.
Earlieritwasalludedtoataxischargedongainsorprofitsfromabusinesscarriedonfor
whateverperiod.8TheincomeTaxActdefinesabusinesstoincludealltheillustrated
whichinclude,atrade,avocationandadventuretomeanventureIpresume.Inlinewith
this,allthatfallswithinthedefinition,whichgeneratesaprofit,orgainisqualifiedas
legalandthereforetaxable.
Illegalincomewouldbederivedfromtheactivitiesnotincludedinthe
definitionofabusiness,whichincludetheft,prostitution,andotherillgottenmeansof
obtaining an advantage, not excluding trade in narcotics. We should remember that,
6 Article24,advicesontheparametersonlimitation
7Article25oftheConstitutionofKenya2010illustratesthoserightsthatcannotbelimitedandArticle49
rightsarenotamongsuchrights.
8Section3oftheIncomeTaxAct

illegalorlegalincomeisnotdefinedintheIncomeTaxAct.KenyaRevenueauthorityis
mandatedtosubjecttaxsystemthatisoptimalforthegenerationofadditionalincome
fromthepublic,suchrevenueisusedfordevelopmentandprovisionofgovernmental
functionssuchassecurity.Itistothiseffectthereforeallsourcesofrevenueshouldbe
remittedbacktothegovernmentthroughtaxationmoresotaxationontheirsourceof
income.
Themainchallengeofthisthereforeisthat,therearenoguidelinesonremittanceof
illegalincomealsomostimportantlyonesconstitutionalrightagainstselfincrimination
isinfringed.
TheRightagainstselfincriminationasexhibitedinArticle50(l)isnotan
absolute right and Article 24 of the Constitution 2010 illustrates the qualifying
parametersinwhicharightundertheBillofrightsmaybelimited.Whenitcomesto
issues of taxing illegal income the overarching purpose of taxation is to provide
additionalincomeaspreviouslyillustratedandthereforethisisinlineofthebetterment
ofsociety,Article24onthesameinapplicationelucidatesonthefactorsofenjoymentof
rights,asmuchasthoseindividualsareconductingillegalactivitiestheyareprotectedby
theBillofrightsincludingArticle50andalso49,sucharightshouldnotbesoenjoyed
thatitprejudicesthepublicingeneral.
Thepublicingeneralremitstaxestothequalifiedauthorityandthereforewith
applyingtheprincipleofequityallindividualshouldremittaxesequallyaccordingto
theirpurchasingpowers anddisposableincome.Whythenshouldntsuchincomebe
taxable?,thesameArticlealsoconfirmsthatinlimitingArticle50(l)inlightofdisclosure

ofsourcesofincomefortaxpurposes,itshouldalsoapplythatifanindividualisto
disclosesuchincomeallavenuesoralternativesarefirstlyconsideredbeforelimitingthe
right. In application to the forgoing therefore we can only be persuaded by other
jurisdictionthatsubjectillegalincometotaxtheforthcomingdivulgesintothis.
JURISDICTIONSTHATPROVIDETAXLIABILITYONILLEGALINCOMES.
EarlieronitwasrevealedthattheUnitedStatesBillofRightsalsoprovidesforthe
right against selfincrimination. Equally, the American Taxation system has been
successfulinchargingtaxliabilityfromillegalincome.Thefollowingwillanalyzethe
systemadoptedinchargingsuchincomeandalsoissuesonhowchargingsuchincome
doesnotinfringeontherightagainstselfincrimination.
TheFederalgovernmentrequiresthatmoneyacquiredthroughillegalmeansbe
reportedandtaxedjustlikelegitimateincome.9 Thereforetheproceduresofremitting
legitimate income or returns should apply to realized profits out of unscrupulous
businesses.TheIRSinstructionsonTaxation,underotherincomesincludethatbribes,
gains from activities of gambling should be included for the purpose of tax. Most
importantlytaxationonillegalincomeisprovidedwhichincludesprofitsmadefromthe
saleofnarcotics,ifonewasindividuallyconductingsuchactivities.10
Toalsoaddon,Congressshallhavepowertolayandcollecttaxesonincomes,
from whatever source derived, without apportionment among the several States, and
without regard to any census or enumeration.11 The words emphasized are a clear
9 AccordingtotheIRSinstructionfoundhere,accessedJune15,2016
<https://www.irs.gov/publications/p17/ch12.html>
10ibid
1116thAmendmentoftheUSAConstitutions

indication that gains derived from illegalities are subjected to tax through appointed
provisions.
Theabovewasappliedinseminalcase,Commissionervs.Sullivan12following
theprohibitionperiodwheretheJudgeruledthat,thedeletionofthewordlawful(which
isnowreplacedwiththepreviousemphasis)foundthatincomeearnedinviolationofthe
National Prohibition Act was taxable. Following this case, income earned from
smuggling,gambling,bookmakingandkidnappinghasbeenheldtaxable.
HowthendoestheUnitedStatesdealwithmattersontherightagainstselfincrimination
inlightofdisclosureofillegalincomes?
InJamesvsUnitedStates13,moneyobtainedbyataxpayerillegallywastaxable
income,eventhoughthelawwouldrequirethepersontopaybackthemoneythatwasill
gottentothepersontowhomsuchincomewasacquired.
TheFifthAmendmentprivilegeallowsonetoreportillegalincomewithoutrevilingits
source.TheIRScategoricallyprovidesthatsuchincomefromillegalactivitiesshouldbe
filedforreturnsconversely;suchdeclarationofincomeisstrictlyconfidentialasperUS
code26onConfidentialityregulations.14
TheUnitedKingdomontheotherhand,hasnocodifiedConstitutionbuthas
codifiedStatute,whichcollectivelyformpartoftherights thatareundertheBillof
rights. The Data Protection Act15 Contains guidelines on the disclosure of sensitive
information,thisincludessensitiveinformationthatwouldbeselfincriminating.There
12274U.S259(1927)
13366U.S213(1961)
14GarnervsUnitedStates
15Section1,schedule1sensitivepersonaldata

havebeendebatesthatsuchinformationshouldbeprovidedsoastohelpthepoliceto
catchandseizeillegalsourcesofillgottenincome.16

CONCLUSIONANDRECOMMENDATIONS
TheKenyanpositiononthetaxationonillegalincomeissilent,nodefinitionis
givenonwhatlegalincomeisoritssourceinwhosederivativeisconsideredlegal.The
InterpretationandGeneralProvisionsActdoesnotprovideonthedefinitiononwhat
constituteslegalorillegalincome.
Itisinrespectoftheabovethedefinitionofbusinessforthesakeofachargeunder
tax, conforms to what may be legal and therefore legal income is derived from the
elementsofthedefinition.EmploymentincomeisalsosubjectedtoachargeonTaxas
illustratedinSection3,howeverifanindividualpartakesinanillegalactivityunderan
illegalcontractofemployment,theyaresaidtohavebeencommittingandillegalityand
thereforesuchcontractisnullandvoid.17
In the above stand point the Judge proceeded to state that, due the breach of the
ImmigrationActsection13(2)f,notaxcanbeassessedsincethecontractwasbornout

16 Accessed 15 June 2016< http://www.telegraph.co.uk/finance/4470391/Privacylaws-allow-criminals-to->

17

Republic Vs Kenya Revenue Authority exparte Yaya towers Civil appeal. 324 of 2006

ofanillegality.TheJudgewentontostatethat,suchincomeiftaxedwouldgoagainst
publicpolicysincethiswouldconferabenefitfromillegality.
Therearetwowaysinwhichthiscouldbeanalyzedotherthantheabove,public
policyalsodemandsthattheprincipleofequityandneutralitybeadheredtothatevery
memberofthepublicremitstaxesirrespectiveoftheirpublicgain.Themostimportant
issueinrespectofalltheaboveareConstitutionalconstraintsinwhichalsoanyCourtof
Lawstandsguidedinapplicationwith.Therightagainstselfincrimination,althoughit
hasbeenpreviouslyalludedtothatillegalincomegottenfromillegalactivitiesisnot
taxable,howevertheotherhandpointsoutthatduetoalsopublicpolicyinorderto
conformtoanoptimaltaxsystemallincomesshouldbetaxedsoastoexhibitneutrality,
andequity,thisiswhatcreatesanoptimaltaxsystem.18
ThepositionthattherightertakesistheoverarchingaimofTaxingasociety,a
societyistaxedforthebettermentandeconomicstabilityinthetermsofdistributionof
income,provisionsforbetterinfrastructureemploymentandsoforth.Itiswiththese
desires that the Government taxes its citizens. Kenya is made up of a large sector
constitutingoftheshadoweconomytheseincludeprostituteswhichislegalbutrampart
atthesametimebutyettheincomereceivedisnottaxed,whichthencreatesaleakageon
theoverallgenerationofpublicrevenue.Ifsuchillegalactivitiesincomecanbetaxedin
otherjurisdictionswhynotemploythesestrategiesinKenya.
Provisionsonthedisclosureofillegalincomesderivedhavetobeprovidedfor
eitherunderproceduralrules,asisthecasewiththeUSAorpolicyandlegislationasis
thecaseintheUK.Itiswithothersupportinglegislationandrulesthereforetheright
18 Adam Smiths Canons on Taxation

againstselfincriminationissafeguardedifataxsystemistoconferachargeonillgotten
income.
Anothersuggestionfinallywouldbethat,becauseoftheinalienabilityofsuch
rightsuponadmissionofarrestpersonscanfirstlybetriedinacourtofLawmaintaining
Article49rightsofarrestedpersonsintermsoftherighttoremainsilent.Itisduringthe
rulingthattheJudgewillcompelsuchapersonwhoseincomeisbegottenfromillegal
meanstodeclaresuchfortaxliabilitypurposes.Thiswillbeachargedeductedonthe
amountofillgottenincomeforthepurposeoftaxliability.