Tax compliance in Kenya operates within a self-assessment system. This means that responsibility is placed upon the taxpayer to accurately declare and remit taxes that are due.
Most recently, the Kenya Revenue Authority has intensified its efforts in collecting revenue, and in its routine audits and assessments, disputes are bound to arise with the taxpayers. Such disputes pose significant issues to business and individuals. That is why the Tax Procedures Act provides for a framework within which such disputes are resolved. In this Article, we unpack the tax dispute resolution process in Kenya and the avenues available to resolve tax-related disputes.
Understanding Tax Disputes Under Kenyan Law
A tax dispute generally arises when a taxpayer disagrees with a tax decision issued by the Commissioner of the KRA. Such disputes often arise from issues such as additional assessment of the taxes due, denial of deductions or exemptions, imposition of penalties and interests, refusal to grant a tax refund, or a difference in the interpretation of tax laws.
Under the Tax Procedures Act, the Commissioner is not bound by the information provided by a taxpayer and may instead assess the tax payable using information available to him. This is a broad statutory power which, while on one end is necessary for efficient revenue collection, it is often a trigger to tax disputes, particularly when a taxpayer views the assessment by the Commissioner as excessive or arbitrary.
Due to such disputes, there are certain dispute resolution systems put in place to ensure tax disputes are handled internally before the matter escalates to other litigation forums at the Tribunal or the Courts.
Commencing a Tax Dispute: The Objection Process
The first and most critical step in resolving a tax dispute in Kenya is the lodging of an objection against the Commissioner’s decision.
A taxpayer who is dissatisfied with a tax decision must submit a Notice of Objection within 30 days of being notified of the decision. This objection must be precise, comprehensive, and supported by relevant documentation. The law requires the taxpayer to clearly outline the grounds of objection, the amendments sought, and the reasons supporting those amendments.
In cases involving tax assessments, the taxpayer must also pay the undisputed portion of the tax or apply for an extension of time to do so. Failure to meet these statutory requirements may result in the objection being deemed invalid, effectively closing the door to further dispute resolution avenues.
Once a valid objection is lodged, the Commissioner is required to issue an objection decision within 60 days. If the commissioner does not issue a decision within the 60 days, the objection is deemed to be allowed. This is done so as to prevent any delays which would otherwise greatly prejudice a taxpayer.
Alternative Dispute Resolution
Prior to 2015, most tax disputes ended up in litigation. However, since then, Alternative Dispute Resolution has been incorporated in tax disputes, which has significantly reduced the backlog and strain on resources for both the taxpayer and KRA.
Just like ADR in other forums, ADR under the KRA framework is a voluntary, facilitated mediation process that allows taxpayers and the Commissioner to resolve disputes outside the Tax Appeals Tribunal or courts. It is a seamless avenue through which parties can achieve a mutually acceptable outcome without the fuss and adversarial nature of litigation.
ADR may be initiated at various stages of the dispute, including:
- Before an objection decision is issued
- During proceedings before the Tax Appeals Tribunal
- While a matter is pending before the courts (with leave)
However, ADR is not suited for all kinds of disputes. For instance, matters involving constitutional issues or serious questions of law, or a matter that requires judicial interpretation, cannot be subject to ADR.
Appeals Before the Tax Appeals Tribunal
When objections and ADR do not resolve the dispute, the next battleground is the Tax Appeals Tribunal (TAT).
An appeal to the Tribunal must be filed within 30 days of receiving the objection decision from the Commissioner. In lodging the Appeal, a dissatisfied taxpayer is required to file a Notice of Appeal, followed by a Memorandum of Appeal, a Statement of Facts, and the Commissioner’s decision within 14 days after filing of the Notice of Appeal.
It is also important to note that a Notice of Appeal to the Tribunal relating to an assessment is only valid if the taxpayer has paid the tax not in dispute or entered into an arrangement with the Commissioner to pay the tax not in dispute under the assessment at the time of lodging the notice. The taxpayer is also expected to pay a refundable fee of 20,000 shillings for lodging the Appeal.
The Notice of Appeal should be served to the Commissioner within two days, and the Tribunal is mandated to hear and determine appeals within 90 days of filing. Proceedings before the Tribunal are less formal than court litigation, but they remain evidence-based. The Tribunal’s decision is binding and enforceable as a court judgment, subject to appeal on points of law.
Litigation Before the High Court and Court of Appeal
A party dissatisfied with the Tribunal’s decision may appeal to the High Court, strictly on questions of law. Such appeals must be lodged within 30 days, although the Court may extend this period in appropriate circumstances.
Further appeals lie to the Court of Appeal, again limited to legal issues and questions on points of law.
Who bears the burden of proof?
In Kenyan tax disputes, the burden of proof rests on the taxpayer. The taxpayer must demonstrate that the Commissioner’s decision is incorrect. This is now well settled by the courts in various decisions.
In Commissioner of Domestic Taxes v Metoxide Africa Limited (Tax Appeal E121 of 2021) [2022] KEHC 14613 (KLR), Justice Majanja aptly explained the nature of the burden of proof in tax disputes as follows;
“The question before the court that was also before the Tribunal was whether the Respondent discharged its burden of proof by demonstrating that the Commissioner was incorrect in its decision. It should not be lost that the burden of proof in tax matters is not stationary but is like a pendulum swinging between the taxpayer and taxman at different points but more times than not swings towards the taxpayer. The uniqueness of our tax system in placing the evidential burden of proof on the tax payer is neither a mistake nor is it unconstitutional. In Republic v Kenya Revenue Authority; Proto Energy Limited (Exparte) (Judicial Review Application E023 of 2021) [2022] KEHC 5 (KLR) (24 January 2022) (Judgment) the court stated that:
(48)
The most significant justification for placing the burden of proof on the tax payer is the practical consideration that the Commissioner cannot sustain the burden because he does not possess the needed evidence. Under the system of self-reporting tax liability, the taxpayer possesses the evidence relevant to the determination of tax liability. It is simply fair to place the burden of persuasion on the taxpayer, given that he knows the facts relating to his liability, because the commissioner must rely on circumstantial evidence, most of it coming from the taxpayer and the taxpayer’s records. The taxpayer must present a minimum amount of information necessary to support his position. This safety valve seems to place the burden of production on the taxpayer without relieving the Commissioner of the overall burden of proof. The tax payers’ evidence must meet this minimum threshold.
(49) A presumption of correctness arises from the Commissioner’s determination/assessment. The presumption remains until the taxpayer produces competent and relevant evidence to support his/her position. When the taxpayer comes forward with such evidence, the presumption vanishes and the case must be decided upon the evidence presented.
As such, it is clear that the evidential burden of proof rests with the taxpayer to disprove the Commissioner and that once competent and relevant evidence is produced, then this burden now shifts to the Commissioner.
Conclusion
The Tax Procedures Act, 2015, provides a structured and comprehensive framework for resolving tax disputes in Kenya within which taxpayers have different avenues to address tax disputes. However, the effectiveness of these mechanisms largely depends on an informed strategy. Tax disputes can be complex, but if handled correctly, a tax dispute can be resolved efficiently and on favourable terms.
Speak to Our Tax Dispute Resolution Team at ESK Advocates LLP
If you are facing a tax assessment, audit, penalty, or enforcement action by the Kenya Revenue Authority, early intervention is critical.
At ESK Advocates LLP, we advise and represent taxpayers across the various tax dispute issues from objections and Alternative Dispute Resolution to Tribunal proceedings and complex tax litigation. Our approach is strategic and commercially focused to ensure the most favourable outcome.
Contact us today to discuss your tax dispute and explore the most effective path to resolution.
Add a Comment