In recent years there have been several high-profile tax disputes between the Kenya Revenue Authority (KRA) and some of the biggest entities in Kenya's corporate world. These disputes have often involved huge sums of money and for that reason, the outcomes of these cases take on significant importance for both the taxpayer and the revenue authorities. Not only are the outcomes important to the parties in the dispute, but any decision or judgment ultimately reached may set a precedent for different parties involved in disputes of a similar nature in the future. With this in mind, what are the dispute resolution options available for Kenyan taxpayers?
In Kenya, tax disputes usually arise following a tax assessment issued by the KRA to a taxpayer following an in-depth audit or a routine compliance check. Alternatively, an interpretation of facts involved in any dispute, or the law applicable or both can also lead to a tax dispute. The Tax Procedures Act provides that a taxpayer can contest assessments issued by the revenue authorities. Firstly, a taxpayer may file a formal objection to a tax decision to the Commissioner. If the taxpayer is not satisfied with the resulting decision on the objection, they may appeal the decision to the Tax Appeals Tribunal. Beyond the tax appeals tribunal, the taxpayer may file further appeals to the High Court of Kenya and the Court of Appeal. When an appeal is before the Tax Appeals Tribunal or the courts, the taxpayer or Commissioner may voluntarily request for the dispute to be handled through alternative dispute resolution mechanisms, the ADR. ADR refers to an alternative method of handling disputes outside the tribunal or court system.
The KRA established its Alternative Dispute Resolution Framework effective from 1 July 2015. Prior to its creation, it is estimated that the amounts in question in various unresolved tax disputes totalled to KShs 35 billion. Since the launching of the ADR Framework in 2015, it is estimated that more than 140 disputes have been resolved through ADR with over KShs 6.5 billion recovered after resolution of these disputes.
While the establishment of the ADR Framework in dispute resolution is a welcome move, Kenya is still a long way from achieving the desired international standards. Global best practice recommends that 80% of tax disputes should be resolved through ADR. As per USAID's 2013 report on Leadership in Public Financial Management, 95 % of Canada's tax disputes are resolved through ADR, with Australia and Brazil recording impressive rates of 85 % and 75 % respectively. In Africa, South Africa is estimated to resolve about 66% of its tax disputes through ADR, with Kenya recording a lowly 36 %.
Some of the benefits associated with ADR, as compared to the court system in Kenya, include reduced dispute resolution costs, faster resolution process as well as confidentiality due to the private nature of the process. Internationally, the trend is moving towards adoption of ADR mechanisms as a means to settle tax disputes.
Since 2015, the Organization for Economic Co-operation and Development (OECD) has been developing and implementing action plans and initiatives to tackle Base erosion and profit shifting (BEPS). Kenya is a signatory to OECD and is one of the 100 countries and jurisdictions under OECD's inclusive framework which seeks to enhance collaboration to implement the BEPS measures and tackle BEPS. Action Plan 14 of OECD's BEPS initiative relates to increasing effectiveness of dispute resolution mechanisms. The OECD recommends that disputes being handled on the basis of mutually agreed procedures should be resolved within a period of 24 months.
The OECD Action Plan on effective dispute resolution also includes an option for arbitration for willing countries. This can especially be utilized in Kenya through the recently inaugurated National Centre for International Arbitration (NCIA). With Kenya increasingly being seen as the preferred destination to be the African base for many multinational entities (MNEs), coupled with KRA's increased focus on their tax practices, the NCIA may prove useful in resolving tax disputes involving multinationals.
To conclude, it is important for taxpayers to be aware of the different dispute resolution mechanisms available to them in the event of a dispute with the revenue authorities. Intense focus of the media and the general public on a company's tax matters can have a significant impact on their corporate reputation and it is thus vital to try and resolve any tax disputes in an efficient and low-key manner.
It should also be noted that the number of tax disputes will rise in the near future due to an increasingly aggressive and sophisticated approach by the revenue authorities. This is a trend seen in many countries worldwide due to greater co-operation between different tax authorities as well as advanced information technology facilitating deeper and faster investigations into companies' tax matters.
How alternative tax dispute resolution helps business
Alternative dispute resolution draws its legitimacy from the Constitution, Tax Procedures Act, Tax Appeals Tribunal Act and Kenya Revenue Authority (KRA) framework. The Constitution provides that in exercising judicial authority, courts and tribunals shall promote the use of alternative forms of dispute resolution, including mediation and arbitration.
The ADR process takes the form of facilitated mediation moderated by a member of the KRA’s Corporate Tax Dispute Resolution Department. The department’s team is drawn from tax experts with a wealth of experience in handling tax matters within KRA.
While the team appears to be independent in execution of its mandate, the fact that they are employees of the KRA casts doubt on their actual autonomy and undermines confidence in their impartiality.
Alternative dispute resolution may be initiated by either the taxpayer or the KRA. This could be done any time after the appeal has been filed at the tribunal but before the closure of the case. Once alternative dispute resolution has commenced, the proceedings at the tribunal are paused (“stayed” in legal parlance) for 90 days to give room for negotiations. The parties may continue to negotiate even after the lapse of the 90 days, provided they record a consent with the leave of the tribunal before judgement is delivered.
The alternative dispute resolution mechanism provides various benefits, not available in litigation, to the parties. First, the alternative dispute resolution process is expeditious and saves the parties considerable time.
The negotiations should commence and be concluded within 90 days. However, the parties may with reasonable grounds apply to the tribunal for an extension of this period.
Additionally, once consent has been recorded before the tribunal, there can be no appeal on the substance of the consent. This means that unlike litigation where there are three possible levels of appeal, the time spent on the alternative dispute resolution process is limited to a single level.
Second, the alternative dispute resolution process is relatively cheaper than litigation. The legal fees paid to advocates and tax consultants is lower than the cost of litigation. Additionally, since there are no appeals where a settlement is reached, the parties save on the costs, which would have been incurred in the appeal process.
Moreover, besides negotiating the taxes payable, taxpayers can also negotiate a payment plan for the taxes conceded that may not be possible in the litigation mechanism.
Third, the alternative dispute resolution process is more efficient in handling issues relating to facts and reconciliations.
The taxpayer is accorded an opportunity to explain the facts and numbers to KRA’s audit team who have experience in dealing with numbers and reconciliations.
This is done under the guidance of the moderator, who directs the negotiations from an objective perspective.
In litigation, tribunal members and judges may not have a good understanding of accounting concepts and reconciliations, which places the parties at a disadvantage where these form the core issues.
Fourth, the taxpayer has control over the process and outcome since the alternative dispute resolution agreement is only binding when signed by both parties.
The negotiations are conducted on a “without prejudice” basis, meaning that any admissions made by either party cannot be subsequently used against them before the tribunal or the court, should the alternative dispute resolution process fail.
The proceedings are private and the specifics are not disclosed to the public, which promotes privacy and ensures the confidentiality of the taxpayer’s information and affairs.
However, alternative dispute resolution is not suitable for all cases nor is it always the best dispute resolution mechanism. For example, it would not be appropriate where the issues involved relate to the interpretation of the law, where a settlement would be contrary to the provisions of any existing law, where it is in the public interest to have the issues clarified in the judicial system and where the non-compliance was deliberate on the part of the taxpayer.
Alternative dispute resolution has played a key role in reducing the backlog of cases at the tribunal.
There is a need to strengthen the alternative dispute resolution framework to accommodate more cases and to enhance and secure the independence of the Corporate Tax Dispute Resolution Department members who undertake the mediation process.
There is also a need to sensitize taxpayers more on the benefits of alternative dispute resolution, noting to highlight that the process takes into account business realities, which may not be relevant considerations in the litigation process.
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