Implications of tax avoidance

Last week, we dwelt on the Kenya Revenue Authority’s proposal to establish a tribunal to review disputes which arise from “tax avoidance adjustments.”

Contrary to general belief, tax avoidance is not legal, and neither is tax evasion.

A closer look at Kenya’s tax anti-avoidance provision may be useful to business people.

To start with, the section that provides for adjustment of transaction on account of tax avoidance is labelled not as “tax avoidance” but rather as “transactions to avoid liability to tax”.

This provides an indicator that there must have been some deliberate effort to arrange the transaction in such a way as to avoid taxes.

It provides that the “where the commissioner is of the opinion…”.

This basically gives the commissioner discretionary powers and there is nowhere in the section or in the Act that seems to control these discretionary powers.

The Act only goes on to further provide that the Commissioner only needs to specify the transaction(s) and the adjustments that he considers appropriate.

At no point is he required to give his justifications for the opinion, effectively pushing the burden of disputing to the taxpayer (with only a call to his conscience to the effect that it needs to be “just and reasonable”). Without the tribunal, the taxpayer could be at great disadvantage.

The powers of the Commissioner would be exercised where, in his opinion, the main purpose was the avoidance or reduction of tax liability and where the main benefit for the succeeding three years is the avoidance or reduction of tax liabilities.

Tax benefits

From this, one needs to be careful where the transaction has no immediate tax benefits, but the benefits are deferred for the next three years.

It would seem that if the benefits arise in year five, then the taxpayer would be off the hook.

Though the section allows the Commissioner to charge the tax that was avoided, it does provide that the he is free to make any such adjustments as he deems just and reasonable.

It does not say just and reasonable to whom, though it is expected to be to all parties.