ALTERNATIVE TAX DISPUTE RESOLUTION
FRAMEWORK
Presented by: J. W. Kamande (Mrs.)
DEPUTY COMMISSIONER
CORPORATE TAX DISPUTE RESOLUTION
DIVISION (CTDR)
17TH JUNE 2015
e-mail – juliet.kamande@kra.go.ke
www.KRA.go.ke
Scope Of Presentation
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Introduction
Alternative Dispute Resolution (ADR) - What is ADR? and
Why ADR? (Benefits/Objectives of ADR)
Purpose of ADR Framework
Is ADR anchored/backed by Law?
Who should initiate ADR? When does ADR kick in in the cycle of a
Tax Dispute
Internal governance structures and roles of the parties in ADR
discussion's.
ADR Timelines
Termination of ADR discussions.
Can all Tax Disputes be settled under ADR?
ADR Agreement terms
Reservation of Rights during ADR discussion
Second ADR attempt
Signing of ADR Agreement and its binding effects
Challenges
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Principle of Equity in Taxation
• The principle of equity in Taxation which 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.
• Article 201 (a) (i) “The burden of taxation must be shared
fairly
• Mathew 22:21 "So give back to Caesar what is Caesar's, and
to God what is God's.“
• Benjamin Franklin, (President of America 1705 – 1790) said
“Our new Constitution is now established, and has an
appearance that promises permanency; but in this world nothing
can be said to be certain, except death and taxes.” –
www.freakonomics.com
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Why then do disputes arise?
Disputes may arise for various reasons;
• Issuance of additional assessments, basis of
an inclusion of any amount, 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.
• Rights in a dispute include, objections and
appeals (quasi judicial bodies) or litigation in a
Judicial process
Source – Revenue Statutes
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Do you know this man? Alphonse
Gabriel alias "Al" Capone
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The People vs. Al Capone
•
Al Capone, head of the most profitable crime syndicate of the Prohibition
Era and mastermind of the notorious 1929 "Valentine's Day Massacre,"
seemed above the law. In the end, however, Capone would be brought
to justice not for murder, extortion, or bootlegging, but for failing to pay his
income tax. Credit for his conviction is due less to Elliot Ness and The
Untouchables than to the dogged work of Bureau of Revenue investigator
Frank Wilson and a clever surprise pulled by a federal judge, James
Wilkerson. Al Capone once complained about the bad reputation of his
criminal enterprise: "Some call it bootlegging. Some call it racketeering. I
call it a business." The lesson of The People vs. Al Capone is that a profitable
businessman, no matter how he earns his income, does have to pay his
taxes. www.fbi.gov
•
The lesson above is mirrored in Income Tax Act Cap. 470
“Section 3(1) which provides “Subject to, and in accordance with this
Act, a tax to be known as Income Tax shall be charged for each year
of income upon all the income of a person, whether resident or non
resident, which accrued in or was derived from Kenya”
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What is Alternative Dispute
Resolution (ADR) in a Tax dispute?
It is an alternative method of handling tax
disputes outside
• The Judicial process (Courts of law)
•The Quasi Judicial Process (Tribunals) ;
www.law.cornell.edu.com
•It is an internal mechanism to expedite
resolution of tax disputes.
•ADR settlements must have their legal
basis within the Revenue Statutes.
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Why ADR - What are the Benefits of
ADR?
•
•
•
•
•
•
Expedited resolution of tax disputes; (value for
money today)
Decrease cost of dispute resolution viz
litigation, (cost effective)
Enhance and manage relationships between
KRA and TP; (Non-adversarial)
Improve service delivery (Trust and Facilitation)
Enhance customer satisfaction (improve
compliance).
Confidentiality (away from the glare of the
public/business competitors
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What are the Objectives of this
Framework?
•
Provide a taxpayer focused approach to dispute resolution.
•
Provide internal structures and processes which will support
tax dispute resolution through oversight, monitoring and
management of the ADR processes,
•
Provide for the creation of a central database on tax disputes
handled in ADR to guide future dispute resolution for consitency,
•
Provide for the rules of conduct for the parties during the
ADR discussions.
•
Provide for timelines for resolving tax disputes so as to
bring efficiency to the process,
•
Provide an additional approach for dispute resolution to
compliment the existing internal dispute resolution
mechanisms provided in the Revenue Statutes.
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Is ADR anchored/backed by
Law?
•
•
•
•
Constitution of Kenya, 2010 Article 159 (2) (c)
Revenue Statutes (the Commissioner may
engage ADR at the review of an objection
before confirmation),
The Tax Appeal Tribunal Act - TATA (Sec. 28)
Tax Procedure Bill Clause 55 (Tax Procedure
Act, Section 55)
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Who should initiate ADR and when does ADR
kick in?
ADR is voluntary and either the Taxpayer (TP) or the
Commissioner can initiate ADR and it can kick in at any stage of
a dispute where a party to the dispute desires to engage ADR
•
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 (within 60 days as per internal
guidelines).
•
When a dispute is before a Court of Law or Tribunal – Either
party can initiate ADR (see statutory deadlines for Concluding
discussions – Re; Clause 55 of Tax Procedure Bill.
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External Stakeholders and their
Roles
KRA recognizes that the success of ADR
depends on close working relationship with
external stakeholders, who include;
•Tax Consultant/Legal Advisors
•The Courts/Tax Tribunals
•Professional Bodies.
•Government Agencies (i.e. The Attorney
General, the Director of Public Prosecutions
and Commission for Administrative Justice.
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KRA Internal Structures and Roles
For the success of ADR process, there must be
strong structures to provide oversight to the
process.
•The Commissioner General
•Corporate Tax Dispute Resolution Division
(CTDR),
•The ADR vetting team
•The Taxpayer and his Agent/Consultant,
•The Commissioner’s Technical Team
•The Facilitation Panel
•The Facilitator.
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Independence, conduct and rules
to guide parties to ADR
• ADR Discussions must be held within an
environment of decorum, flexibility and
parties must subscribe to standards of
conduct and rules.
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What are the ADR timelines?
One of the benefits of ADR is that it is a quick/faster way of
resolving tax disputes,
ADR Timelines at the Objection Before Confirmation
• Within timelines in the VAT Act and EACCMA for settling of
objections and in the Income Tax Act within 60 days
(Administratively)
ADR Timelines in a Case pending Before the Tribunal/Court
• 90 days as in Clause 55 of Tax Procedure Bill (Section 55 TPC
Act)
• Tribunal Court initiated ADR - dependent on Court deadlines
given
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Documentation in disputes
under ADR discussions
• ADR settlements must have their legal
basis within the Revenue Statutes.
• Although ADR discussions are meant to
be simple and less cumbersome
compared to litigation a dispute must be
supported by relevant documentation.
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Under what circumstances can an
ADR hearing be terminated?
Just as ADR is voluntary, a discussion can be terminated.
•
If a party or both parties fail to attend the ADR
meeting without reasonable cause after he has been
served.
•
Conduct by one or both parties which may be unconducive for ADR,
•
Where both parties agree to terminate the
proceedings.
•
If a party fails to carry out a reasonable request by
either the Facilitator or the other party.
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Can all Tax Disputes be settled
under ADR? (suitability)
•
•
Not all cases are suitable for ADR and both
KRA and the tax consultant would need to
guide the taxpayer
Disputes Appropriate for ADR (factors to
consider to justify dispute is appropriate for
ADR)
Dispute inappropriate for ADR (factors to
consider to justify that a dispute is not
appropriate for ADR)
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ADR Agreement Terms
An ADR Agreement should contain the following;
• Issues resolved and issues not resolved
(justification)
• Amount of Tax recoverable/Not recoverable
(justification)
• Withdraw of any proceedings pending before a
Court of Law/Tribunal/issue of costs.
• If ADR is reached at the objection stage – terms?.
• Where no agreement is reached, (justification)
• Undertakings by each party
• Mode of payment/payment plans by the Taxpayer
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Reservation of Rights during ADR
discussion
Rights of parties as provided by the Law
are reserved in ADR proceedings until the
conclusion of the discussions (whether
consensus is reached or not).
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Second ADR attempt permissible?
•
To avoid abuse of the ADR Process to
delay determination of a tax dispute, there
will be only one ADR attempt
• However, if new material evidence is
available which if produced would assist
unlock the dispute parties may agree to
engage ADR and the timelines remain the
same.
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Alteration/Amendment of Assessment
on Signing of ADR Agreement
• The Commissioner shall alter/amend an
assessment to give effect to the settlement
terms after the agreement has been signed.
• Any altered/amended assessment shall not
be subject to an objection and appeal or any
other litigation except;
•
to correct an arithmetical error,
•
an error on the face of the assessment or,
•
to the extent that the content of the altered
assessment is not in line with the terms of the
signed agreement
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Signing of ADR Agreement
•
•
•
•
Where parties to the dispute have agreed on
terms;
Agreement terms must be put into writing,
signed by both parties/taxpayer’s agent and
witnessed by the Facilitator.
Each party to retain a copy of the signed
agreement
Signed agreement shall be in full & final
settlement and shall be binding to both
parties.
Agreement can be produced as evidence.
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Records, Data and Approvals
(internal to KRA)
Documentation is important in ADR discussions
and both the Commissioner and CTDR must;
• maintain records/data of all disputes handled
under ADR.
• Revenue foregone/Revenue collected
/estimated cost of savings
• The Commissioner to notify the Auditor
General – of any revenue foregone giving
justification. (Article 210 (2) (a) (b)
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Implementation Strategy
• For full implementation of the
Framework various strategies must be
put in place.
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Review of the Framework
• The Framework shall be reviewed from
time to time to reflect changes in Law,
Policy and other Regulatory Framework
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SAMPLE OF 12 CASES BTWN KRA AND TP- OUTCOME & UNCERTAINTY TO BOTH
TP/KRA?
No.
TAX PAYER
YEAR FILLED
AMOUNT
1.
2007
2.
2006
3.
2002
4.
2005
2,574,747,385.00
Pending Hearing
5.
2008
442,205,324.00
Pending Appeal
6.
2003
364,054,006.00
Pending appeal
7.
2005
206,000,000.00
Pending hearing
8.
2011
5,620,730,161.00
Pending Appeal
9.
2007
124,720,037.00
Pending hearing
10.
2007
906,656,082.00
Concluded. Cannot collect
(company went under).
11.
2009
1,514,489,931.00
12.
2011
529,333,839.00
TOTAL
1,377,505,229.00
CURRENT STATUS
Pending Appeal
1,010,000,000.00 Pending Appeal
117,000,000.00 Pending Appeal
14,787,441,994.00
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Under Receivership
Pending Hearing
ADR IN SARS 2011 - 2014
500
450
400
350
300
250
Cases Finalised
Cases Received
200
150
100
50
0
2011
Cases Finalised
Cases Received
2012
2011
402
354
2013
2012
333
351
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2014
2013
381
480
2014
440
306
FINANCIAL BENEFITS FOR SARS - COST EFFECTIVENESS
FOR ADR
ITEM
Estimated
Settlement Costs
(ADR Unit)
Estimated
Litigation Costs
(SARS In-House
Lawyers &
Counsel)
Total Salary Cost
plus Counsel fees
R11,178,800 (27%)
R41,303,855
Total cases
finalised by
ADR/Litigation
357 (155%)
230
Average cost per
finalized case
R31, 313 (17%)
R179,582
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BEST PRACTICE COUNTRIES ON ADR,
For best practice it is recommended that 80 %
Tax Disputes should be under ADR,
•
COUNTRY
*Canada
ADR %
95%
*Australia
85%
*Brazil
75%
South Africa
66%
Kenya
36%
*Source -
USAID’s Leadership in Public Financial Management (detailed guidelines for
improved Tax Administration in Latin America and the Caribean – 2013)
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Court scene 1
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Court scene 2
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Court Scene 3 – A stressed Judge or
thinking too hard?
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ADR SCENE 1(ENVIRONMENT)
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Is there a solution?
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ADR scene 2 - Happy Ending!
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Alternative Dispute Resolution Bill
• This is a proposed Bill. Once it becomes
Law KRA will review this to align it with
the Law
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Challenges Expected in ADR
discussions
• Parties adopting hard line approach
instead of a win-win,
• Failure to provide a legal justification to
support a dispute.
• Technical complexity of a dispute
• Dishonesty by the parties
• Failure to adequately document a dispute
(lack of documentary evidence)
• Failure to adhere to timelines hence delay
• Delayed approvals from Treasury of waiver
and penalty applications.
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END OF PRESENTATION
THANK YOU!
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