KRA now gets powers to act against tax avoiding companies

Companies that use legal loopholes to reduce their tax burden now stand to pay hefty fines, following publication of new rules bringing into force the Tax Procedures Act 2015.

The law gives the Kenya Revenue Authority (KRA) powers to go after taxpayers who have been using such gaps to avoid paying taxes without falling foul of the law.

The taxman can now interrogate transactions and reverse those it deems were structured with the sole intention of avoiding tax and order payment of the tax plus a penalty.

The Act, which became effective on January 19, gives the taxman the authority to charge the taxpayer double the amount that was initially due if a transaction is deemed to have been intentionally structured for purposes of avoiding tax.

“If the (KRA) Commissioner has applied a tax avoidance provision in assessing a taxpayer, the taxpayer is liable for a tax avoidance penalty equal to double the amount of the tax that avoided,” says the provision that President Uhuru Kenyatta signed into law on December 15.

Unlike tax evasion, which is criminal and relatively quantifiable, it is not easy to place a finger on tax avoidance but non-profit tax organisations estimate that the practice costs countries billions of shilling in unpaid revenue annually.

Multinationals have for years been accused of using tax avoidance schemes, including registering subsidiaries in offshore tax havens and using them to minimise payments in another jurisdiction.

Until now, there have been no specific regulations and penalties directed at tax avoidance locally, and its introduction is seen as the taxman’s attempt at policing a smoke and mirrors world that is problematic globally.

The European Union recently drafted legislation which, if adopted, will force multinational firms like Google, Facebook and Amazon to publicly disclose their earnings and tax bills in Europe, opening them up for scrutiny.

The Tax Justice Network-Africa (TJNA) last year released a report stating that Kenya’s corporate sector leads Africa in tax avoidance, estimating that KRA could collect an additional Sh106 billion annually with close monitoring of multinational company operations.

READ: Global tech giants give KRA income tax avoidance headache

Kenya, it added, loses approximately Sh640 billion annually through tax evasion.

“The money ends up in tax savings in multinational headquarters and subsidiaries, while data from local firms are manipulated to read losses,” TJNA added, highlighting the gravity of the matter.

TJNA has been particularly critical of the double taxation agreement Kenya signed with Mauritius in 2014, arguing that the law is “loophole-ridden” and open to abuse.

The organisation, which sued the Kenyan government over the pact, argues that the treaty will “undermine economic development by opening up loopholes for multinationals and super-rich individuals to shift profits abroad.”

It highlighted clauses on withholding tax and royalties that could be exploited to the detriment of Kenya’s tax base.

As expected, the tax avoidance clause has elicited sharp debate among finance practitioners because, unlike evasion, it involves operating within the confines of law to minimise exposure.

Deloitte, in an analysis of the Bill before it became law, pointed out that the attempt by KRA to police the legal practice could see taxpayers get unfairly targeted and punished.

The audit firm stated that the taxman could “wield his immense powers when it comes to determining what constitutes a tax avoidance scheme to the detriment of taxpayers.”

This is because the new law does not explain what the so-called aggressive tax avoidance is, leaving it open to interpretation, which Deloitte says KRA could use to target even compliant individuals.

“Additionally, there are fears that the Commissioner may rein in on tax compliant persons and deem certain transactions to be part of a tax avoidance scheme with a view to imposing more severe penalties,” the firm said in its analysis.

Deloitte added that while aggressive tax avoidance should be discouraged, international best practice provides for extensive reporting rules that allow the taxman to detect and seal legal gaps as opposed to penalising taxpayers.

Treasury officials argue that the new law is an attempt to harmonise practices contained in the Income Tax Act, Excise Duty Bill and the Value Added Tax Act into one piece of legislation.

The new law is also targeting tax evaders with new measures, including a graduated fine regime for individuals who deliberately under-declare their taxes. Repeat offenders will be hit even harder.

KRA can now impose a 75 per cent penalty of the tax shortfall, upon determining that a taxpayer deliberately omitted some income from their filings or 20 per cent where it rules that the deficit was not intentionally filed.

Repeat offenders could have their penalties increased by an extra 10 per cent for the second count and 25 per cent thereafter with voluntary disclosures attracting a 10 per cent penalty remission.