ADR the best bet in management of tax disputes

By Paul Matuku       

The Kenya tax regime is based on self-assessment, with taxpayers trusted to declare their taxable income. Self-assessment reduces tax administration costs as assessors do not have to visit each taxpayer. 

However, in some instances the tax declaration process does not end with self-assessment. The commissioner may question the self-assessment by undertaking an audit or Post Clearance Audit in the case of customs declaration. The audit may lead to additional or amended assessments. A taxpayer may contest the assessment leading to a dispute.

A tax dispute is a contention regarding an assessment raised on any tax obligation by the Commissioner of Domestic Taxes or the Commissioner of Customs and Border Control. The dispute arises when the taxpayer has either objected to the assessment, or appealed against the decision by the commissioner at the Tax Appeals Tribunal (TAT) or in the courts of law.

If you flip through a court register of cases lined up for determination, you are likely to come across a good number of cases on tax disputes. Further, there are 789 tax appeals pending before the TAT. These are instances where taxpayers seek legal redress when they are in disagreement with the taxman’s position.

The hope of every taxpayer in a tax dispute is to have the dispute resolved fairly within the shortest time possible. However, due to institutional and infrastructural constraints, our courts and the tribunal take long to resolve disputes. 

Given the growing number of tax disputes in court and at TAT, the authority in the 2015/16 financial year conceived an Alternative Dispute Resolution (ADR) mechanism for resolving tax disputes. 

ADR in tax administration is a tested and globally practiced mechanism where concerned parties seek an alternative way of solving a tax dispute in a non-adversarial manner. It is facilitated by a mediator also known as a facilitator.  Once consensus has been reached, the consensus is formalised through a signed agreement between the taxpayer and the assessing commissioner. Signing of the agreement is witnessed by an ADR facilitator, which is followed by the preparation of a consent that is then filed either at the TAT or in court, depending on where the case originated. Filing of the consent heralds formal closure of the tax dispute.   

Although there are still some parties that opt to take the litigation route, the ADR mechanism is quicker and guarantees consensus within a shorter time, if the parties reach a consensus.  This in turn saves the taxpayer and the commissioner a lot of time. The timeline for reaching an ADR consensus as provided for in the Tax Procedures Act is 90 days. 

In terms of cost implication, the ADR framework is way cheaper compared to litigation. 

In most cases, when a matter is decided through litigation, there has to be a winner and a loser. But through the ADR framework presents  a win-win situation for both the taxpayer and the taxman. At the end of it all, it fosters a cordial working relationship between the two parties. Put differently, the ADR does not result in adversaries and as such, it improves the overall tax compliance rate. 

Since its inception in 2015, the uptake of ADR has risen steadily. The growing number of applications submitted to KRA by taxpayers for this process are some of the indicators to this effect. For instance, when the ADR framework was operationalised in 2015, KRA received only two applications. Probably taxpayers did not have faith in the system then. In the subsequent financial year, KRA received 139 applications which grew to 155  in 2017/18 financial year.  The 2018/19 saw the sharpest spike in ADR applications at 502.

Of the 502 applications, 237 cases with a revenue implication of Sh8.1 billion were successfully resolved. This was a substantial improvement compared to 2017/18 financial year where 90 cases were closed and Sh3 billion collected. 

The increased acceptance of the ADR framework is a result of robust sensitisation and referrals by taxpayers who have benefited from the framework. Apart from saving time, the resulting revenue implication from ADR has been monumental. 

KRA believes that in the near future, ADR will be the first course of action in the event of a tax dispute. 

—The writer is the Commissioner of Legal Services and Board Coordination at KRA