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Ideas & Debate

Tax evasion liability now on individual shoulders

KRA
KRA headquarters in Nairobi. FILE PHOTO | NMG 

Well, the running commentaries on the recently read budget will keep us busy for the next few weeks. I will say one thing: it is very aggressive. For aggressive expenditure to occur, there has to be, commensurately, an aggressive revenue collection. Directors of private and public companies need to be alive to the fact that it is not only the Companies Act 2015 that provides strict liability for individual directors for statutory breaches. The taxman has always been waiting in the wings, ready to hold directors liable for tax evasion.

Originally Section 116 of the Income Tax Act, Cap 470, provided that where an offence under the Act had been committed by a corporate body of persons, every person who at the time of the commission of the offence was a director, general, manager, secretary, or other similar officer of the body corporate, or was acting or purporting to act in that capacity, shall also be guilty of the offence unless he proves that the offence was committed without his consent or knowledge and he exercised all the diligence to prevent the commission of the offence that he ought to have exercised having regard to the nature of his functions in that capacity and in all the circumstances.

Whoa! What a mouthful of a sentence! All those words to simply say: “Boss, if you’re a director or senior officer of a company and that company commits a tax offence, you are also personally guilty of the offence unless you can demonstrate that you were blissfully ignorant and that you were smart enough to try and stop the offence from taking place if your position warranted you knowing that it was going on.”

Someone woke up and realised this was a fairly easy pill to swallow so they designed an amendment to kick the heat up a notch. Particularly in light of the fact that Kenyans love to form companies for all manner of businesses and appoint their friends as directors or proxies. So section 116 was repealed by Act 29 of 2015 and replaced with Section 18 within Act 29 that deals with liability for tax payable by a company.

Because misery loves company and karma is a five letter word related to a female dog, Section 18 brings the company’s shareholders into the tax offence garden party. Section 18(1) states that subject to subsection (2) where an arrangement has been entered into by any director, general manager, company secretary [see what they did there? They clarified the word secretary by narrowing it down to the company secretary] or other senior officer or controlling member of the company with the intention or effect of rendering a company unable to satisfy a current or future tax liability under a tax law, every person who was a director or controlling member of the company when the arrangement was entered into shall be jointly and severally liable for the tax liability of the company.

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Hold my glass for a minute. Apart from clarifying that it’s not just ANY secretary on the hook here, the law now provides that it is a controlling shareholder who is also on the hook for arrangements that prevent both current and future tax liabilities being met. A controlling shareholder is regarded as one who beneficially holds directly or indirectly, either alone or together with a related person or persons, 50 per cent or more of the voting rights, rights to the capital or rights to the dividend. So what happens in subsection (2)? This is where an escape hatch from personal liability is provided. The above mentioned persons shall not be liable if they did not derive a financial or other benefit from the arrangement to evade tax. Well that should be easy to prove, right? Don’t get too excited yet. Abovementioned persons also have to have notified both the company and Kenya Revenue Authority (KRA) that they were opposed to the arrangement once they became aware of it.

I think by now you’re getting the gist of KRA’s mandate over you as a non-executive director, executive director, general manager or company secretary of a Kenyan company. Previously you were allowed to plead ignorance as your defence. But the 2015 amendment doesn’t entertain your ignorance of the offences, rather it places on you the dual responsibility of showing that you not only didn’t benefit financially, but that you also went out of your way to send something more formal than a Whatsapp message to that recalcitrant CEO saying that you were NOT trying to be part of the tax evasion scam. With a copy to KRA stat!

Mull on that this week, as you watch our friends at Times Tower go on overdrive this year.

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