The Kenya Revenue Authority (KRA) has been under great pressure to attain high tax revenue targets owing to the increased public expenditure demands over time, a significant portion of which is expected to be financed from tax revenue.
The high tax revenue targets have emanated from the huge government recurrent expenditures partly explained by the maintenance costs relating to a bloated government. KRA has been forced to sharpen their compliance and enforcement policies to seal any tax leakage loophole. We have witnessed KRA growing aggressiveness in tax collection as evidenced by increased tax audits on various companies which have resulted to tax assessments relating to non-payment or under-payment of taxes to the tune of billions of shillings.
Tax payers on the other hand have developed adaptive strategies aimed at managing tax controversies to reduce compliance costs. The tax payers have become more aware of their rights and in particular in relation to lodging objections to some of the assessments which they consider unfair or in contravention to the tax laws. Further, tax payers are now demanding tax refunds with the same intensity as KRA demand taxes due from them. The result has been more frequent and complex disputes between taxpayers and the tax authorities. There has been general awareness by the taxpayers of their rights and obligations, thanks to the taxpayers\’ charter issued by KRA.
The tax laws in Kenya have legislated channels through which dissatisfied tax payers issued with a tax assessment by the commissioner of tax can seek redress. The tax payer has a right to object to a tax assessment to the commissioner giving grounds of doing so and in the event that the commissioner confirms the assessment, to escalate the matter for arbitration by bodies set up to resolve tax disputes. The appeal bodies consist of; the Local Committee, the Income Tax Tribunal, the Customs and Excise Tribunal, the VAT Tribunal, the High Court and finally to the Court of Appeal.
The tax dispute resolutions bodies have, to a reasonable extent, addressed many tax payers and KRA\’s grievances with transparency and a lot of professionalism. The hierarchical channel allows either of the parties to seek redress to the next appellate body if not satisfied with a certain ruling thereby providing a chance for a fair hearing. The dispute resolution bodies have also clarified many tax areas where the law is ambiguous or silent which are usually the main cause of the tax disputes.
However, the critical factor to note here is the excessive time the processes take from the time a tax payer gives an intention to appeal to an assessment or ruling to the conclusion of the hearing. Whereas the Tax Appeal rules provide specific timelines within which a tax payer should lodge an appeal the same does not give timelines within which the appellate bodies should arrange for a hearing or the period within which each the appellate body should conclude a hearing and issue a ruling. This has resulted to the appeal processes taking very long, being very expensive and not to mention the anxiety this causes the tax payer.
The tax appeal rules also require that for withholding tax and PAYE, all the taxes in dispute and the penalties assessed by the commissioner should be paid before a person files an appeal to the local committee or Income Tax Tribunal. For Value Added Tax (VAT), the full amount of tax as determined by the tribunal should be paid before appealing to the High Court. Requirement by the law that a tax payer pays the tax in dispute before a hearing could be interpreted to mean that a tax payer has already been judged to be guilty and needs to prove his innocence. This is against the basic principle of justice where a person in trial is considered innocent unless proved guilty.
The KRA is required to refund the tax paid in case the ruling is made in favour of the tax payer. However, if history is anything to go by, taxpayers would do everything possible to avoid getting into a tax refundable position. In practice, any tax refund by KRA takes a very long time to be processed as evidenced in VAT claims and other tax overpayments. No time line is given within which the refund of the tax wrongly paid should be refunded to the tax payer. The Income Tax Act provides for payment of interest accrued on tax refunds, however this law only remains in paper since KRA does not pay any interest on tax refunds. This is clearly a case of double standards where KRA is keen on demanding payment of interest on delayed taxes but is reluctant to pay interest on tax refunds to tax payers.
Many countries around the world have realised the need to develop good relationships between the tax payers and the revenue authorities. This has not only created more efficiency in tax administration but has also significantly reduced the cases of disputes leading to litigation which is a very expensive procedure.
The approach has been to develop Alternative Disputes Resolutions (ADR) processes. ADR is a series of approaches that opens up a channel for taxpayers to interact with tax administrations, and resolve issues or disputes, without resorting to litigation. It also includes approaches to work with the tax administrator to obtain certainty on a potential tax issue and reaching an agreement on a certain tax position thereby giving both parties greater certainty and the ability to channel scarce resources into more productive activities. The main benefit arising from this approach is that the revenue authorities cannot later raise an assessment on a position that was agreed upon with them.
Although ADR approach is not very popular in Kenya, it is slowly being adapted. KRA has been supportive of this initiative by responding to the concurrence sought by tax payers on unclear issues, a commendable move indeed. In light of the high costs and time spent on litigation procedures, ADR could be a better approach of resolving tax disputes and litigation should become a last resort when all other avenues to resolve the disputes fail.
(The writer is a tax consultant with Ernst & Young. Email: firstname.lastname@example.org Views expressed are not necessarily those of Ernst & Young)