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Tax Dispute resolution in Kenya


published on March 27, 2018



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.

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