How quick resolution of tax disputes spur economic growth

The principle of equity in taxation that is now anchored in the Kenya Constitution 2010 underscores that every taxable citizen must pay taxes and that everyone must pay their fair share of the taxes.

Tax disputes may arise for various reasons including issuance of additional assessments; an inclusion of any amount or the exclusion of any amount or any other decision by the Commissioner.

An interpretation of facts involved in any dispute, or the law applicable or both can also lead to a tax dispute.

When a dispute is before a Court of Law or Tribunal, either party can initiate Alternative Dispute Resolution (ADR). ADR is voluntary and either the taxpayer or the Commissioner can initiate it.

How to go about it

It can kick in at any stage of a dispute where a party to the dispute desires to engage ADR. ADR is composed of mediation, arbitration, negotiation, conciliation, fact finding, expert determination, private judging.

ADR operates within the timelines provided in the Revenue Statutes for making a decision on the objection (Value Added Tax Act and East Africa Community Customs Management Act, the Tax Procedure Act and in the Income Tax Act.

Although ADR discussions are meant to be simple and less cumbersome compared to litigation, a dispute must be supported by relevant documentation. ADR is now recognized in the Kenyan legal framework. The status of ADR has been raised and its applicability to a wide array of disputes will thus be seen in the near future.

KRA has recovered about Sh6.6 billion in taxation revenues from disputes resolved through the Alternative Dispute Resolution mechanism in less than two years. More than Sh35 billion was locked in various tax disputes before the ADR framework was launched on June 17, 2015.

About 140 tax disputes, which had been pending before the Tax Tribunal, have been resolved through the ADR. Small and medium sized enterprises (SME) in particular suffer from high compliance costs.

The regulatory costs of doing business shows that taxes, in particular VAT, are perceived as the most problematic set of regulations. Above all it is the paperwork that has to be mastered to comply with tax legislation which is deterring firms from meeting their tax obligations appropriately. ADR aims to help to resolve disputes or get agreement on which issues need to be taken for a legal ruling.

New approaches

The availability of amicable resolutions leads to a reduction in the number of cases brought before the courts, which is meant to limit the Judiciary’s role to the position of guardian of the agreements concluded by parties and a source of resolutions in matters in which agreement proves impossible to reach, for example due to discrepancies in the interpretation of regulations or due to the antagonistic attitude of the parties.

Prolonged legal disputes with the tax authorities may have considerable implications for the taxpayer’s operations, sometimes even for an enterprise’s liquidity.

ADR can also lower service costs by shortening the duration of proceedings. Both for the taxpayer and the tax authority, reaching a resolution more promptly means less use of human resources and lower expenses related to bringing a case before the court.

Dissuading taxpayers from taking their cases down the legal and administrative path is not ADR’s chief merit, it should not be underestimated. Increasing the capacity of the courts, allowing the period of waiting for a decision to be shortened, in cases where an amicable resolution has not been reached, generally makes the judiciary more effective.

Introducing an ADR mechanism allows the differences in the interpretation of the tax regulations to be explained and applied to the background of a case already at the stage of negotiation/mediation between the parties.

The main element which speeds up the operation of ADR procedures is the elimination of time-consuming formal issues. This factor is particularly significant to taxpayers who, in order to complete dispute-related formalities, are often forced to use long-term professional support which may generate considerable costs.

Mr Omar is a Commissioner Strategy, Innovation and Risk Management at the Kenya Revenue Authority