The push for improved tax compliance across the globe now involves scrutiny of commercial activities of those designed to facilitate tax evasion.
This has origins in the deepening of globalisation where economic transactions of one entity or individual can traverse multiple jurisdictions.
While this has had advantages such as promoting economic growth, creating jobs while taking advantage of global synergies; it is not without challenges. Tax collection has suffered the most.
Tax laws vary in different jurisdictions as they are based on the economic policies of each country and the social impact that it wants to have.
For instance, a country desiring to reduce the cost of living for its citizens is likely to reduce the percentage of value added tax (VAT) charged on essential goods.
On the other hand, a country seeking to increase foreign direct investment will most likely entice investors with reduced corporate tax rates or tariffs.
The varied nature of tax policies and laws in different jurisdictions has resulted in some having favourable tax environments, charging almost zero tax.
They have popularly been christened as ‘‘tax havens’’ though they prefer being called low-tax jurisdictions. Good examples include Mauritius, the Cayman Islands, the Isle of Man and Bermuda.
Businesses worldwide have taken advantage of this legislative mismatch and organised their business activities in such a way as to benefit from tax relief afforded by the more favourable jurisdictions.
This has been a cause of global concern, especially where some business models are seen as exclusively designed to aid the avoidance of tax.
Debate on tax morality is therefore rife, with the key question being where to draw the line between good tax planning and outright tax evasion.
The Panama Papers leaks present a classic example of this global issue and have pushed the discussion on tax morality as a global agenda. Most tax jurisdictions have been playing catch up, acting and amending their laws when they have already lost a significant amount of revenue.
However, there is growing resolve on the global scale to increase tax compliance and firmly deal with tax evasion. It is against this background that the Organisation for Economic Co-operation and Development (OECD) developed the Convention on Mutual Administrative Assistance in Tax Matters.
The convention seeks to provide a platform for international co-operation and sharing of information in the collection of taxes in a bid to combat tax avoidance and evasion.
This convention is the backbone on which the Common Reporting Standards (CRS) have been developed to create a framework for the sharing of tax-relevant information between and among jurisdictions.
The convention requires jurisdictions to obtain information from their financial institutions such as banks, mutual funds, custodial institutions and stock brokers, and share the information with relevant revenue authorities. This is especially so with regards to the economic activities of non-resident individuals and businesses.
Kenya became the 94th country in the world and the 12th in Africa to sign the convention on the February 8, 2016.
Kenya is thus set to gain from the exchange of information relating to economic activities of its residents in other jurisdictions, thus enforcing tax compliance where necessary. For similar reasons, Kenya has moved ahead to create local laws to facilitate tax collection and stem evasion in light of global co-operation.
Among them is the introduction of a penalty for tax avoidance in the Tax Procedures Act, 2015. The long standing view among most tax experts has been that there is need for a clear distinction between ‘‘tax evasion’’ and ‘‘tax avoidance’’.
Blatant and illegal
Tax evasion is the blatant and illegal refusal to pay tax against the letter and spirit of the law, while tax avoidance means the planning of one’s activities within the law so as to incur the least tax burden possible.
The introduction of the penalty for tax avoidance in the Tax Procedures Act has generated a huge debate in the business and consultancy circles.
Similarly is the tax amnesty introduced by the Finance Act 2016 through an amendment to the Tax Procedures Act, 2015.
The new provision bars the commissioner from computing interest and penalties for offshore income earned prior to December 31, 2016, that is voluntarily declared; provided that the same was not previously subject to an investigation and is declared by December 31, 2017.
It would appear that through the amnesty, the government is giving people as much leeway as possible to voluntarily declare taxable income generated outside Kenya, before the new regime takes effect and closes its jaws on the culprits.
Whether this is a benevolent or malevolent move is subject to discussion, though it is clear that the move will help the Kenya Revenue Authority map people who have not been paying taxes and enforce tax on them going forward.
Should a person opt not to declare, then the regime will close in on them, this time without restriction on tax penalties and interests.
Overall, the global mood is skewed towards promoting total tax compliance and responsible planning.
Businesses and individuals would be better advised to take necessary actions to pay their dues.
Similarly, the successful tax consultant of the future will be one who will be able to weave through the multiple legal requirements while at the same time offering his clients sound and practical business solutions that promote sustainable growth.
Mukiti is a tax advisor with KPMG Advisory Services Limited. firstname.lastname@example.org. The views expressed here are those of the author and do not necessarily represent KPMG’s opinion.