ALTERNATIVE DISPUTE RESOLUTION

Resolving tax disputes outside court

Alternative way of solving a tax dispute in a non-adversarial manner.

In Summary
  • The ADR mechanism is quicker and guarantees consensus within a shorter time, if the parties reach a consensus.
  • Acceptance of the ADR framework is as a result of robust sensitisation and referrals by taxpayers who have benefited from the framework.

The Kenya tax regime is based on self-assessment where taxpayers declare their taxable income. Self-assessment reduces tax administration costs as tax 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 additional or amended assessment leading to a tax dispute.

A tax dispute is, therefore, 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 two commissioners head the respective revenue departments at the Kenya Revenue Authority. The dispute arises when the taxpayer, who is subject to the said assessment, has either objected the assessment, or appealed against the decision by the Commissioner at the Tax Appeals Tribunal or in the Courts of law.

If you randomly 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 in matters where they are in disagreement with the taxman’s position.

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

Given the growing number of tax disputes pending in court and at the TAT, KRA in the financial year 2015-16 conceived an Alternative Dispute Resolution mechanism for resolving tax disputes in the boardroom.

It is facilitated by a mediator also known as a facilitator. Once consensus has been reached, after the ADR process, the consensus is formalised through a signed agreement between the taxpayer and the assessing Commissioner. The signing of the agreement is witnessed by an ADR facilitator, which is followed by the preparation of a consent between the two parties. The consent is then filed either at the TAT or in court, depending on where the particular case originated. Filing of the consent heralds formal closure of the tax dispute.

As the name suggests, ADR in tax administration is a tested and globally practised 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, after the ADR process, the consensus is formalised through a signed agreement between the taxpayer and the assessing Commissioner. The signing of the agreement is witnessed by an ADR facilitator, which is followed by the preparation of a consent between the two parties. The consent is then filed either at the TAT or in court, depending on where the particular 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 considerable amount of time. The timelines for reaching an ADR consensus as provided for at Section 55 of the Tax Procedures Act is 90 days.

In terms of cost implication, the ADR framework is way cheaper compared to the litigation process. In fact, the taxpayer gets to dictate the cost to incur which depends on whether or not they involve lawyers or tax agents to manage their dispute or whether they handle the matter through self-representation.

 

In most cases, when a matter is decided through litigation, there has to be a winner and a loser. However, the dispute resolution mechanism within 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 disputing parties.

Put differently, the ADR does not result in adversaries. Given the circumstances under which the ADR framework operates, it avails a fundamental avenue that addresses concerns of a taxpayer more closely and in a friendlier manner. As such, it improves the overall tax compliance rate.

Since its inception in 2015, the uptake of ADR has been steadily growing. The growing number of applications submitted to KRA by taxpayers for this process, as well as the revenue outcome are some of the indicators that herald the positive uptake.

When the ADR framework was operationalised in 2015, KRA received only two applications. Reason? Probably taxpayers did not have faith in the system and thought it was a bait or did not understand it at all. In the subsequent financial year 2016-17, KRA received 139 applications and in the financial year 2017-18, the applications grew to 155. The past financial year 2018-19 saw the sharpest spike in ADR applications where 502 applications were received.

Of the 502 applications received in 2018-19, 237 cases with a revenue implication of Sh8.102 billion were successfully resolved. This was a substantial improvement compared to 2017-18, where 90 cases were closed and Sh3 billion collected. An analysis of the number of resolved cases in the two financial years indicates an increase of 147 cases, which translates into a 263 per cent increment.

The increase in the application and resolution rates indicates that ADR has increasingly gained acceptance in resolution of tax disputes in Kenya, thereby becoming a preferred avenue for tax dispute resolution. Acceptance of the ADR framework is as a result of robust sensitisation and referrals by taxpayers who have benefited from the framework.

Apart from the ADR framework’s faster resolution rate of tax disputes, the resulting revenue implication has been equally monumental. A revenue increase from Sh3 billion in 2017-18 to Sh8.102 billion in 2018-19 is definitely no mean feat. The potency of an efficient tax dispute prevention and resolution mechanism in stimulating economic growth was actually top on the agenda of the recently held KRA’s Fifth Annual Tax Summit. The summit is a component of the Taxpayers’ Month, an annual fete that KRA marks in October to celebrate all taxpayers.

In the near future, prospects of ADR being the preferred option for dispute resolution are very high. Given the highlighted benefits, ADR will be the first course of action in the event of a tax dispute.

Commissioner of Legal Services and Board Coordination at KRA