The Kenya Revenue Authority (KRA) has escalated its fight with lawyers, insisting that some law firms under-declare their incomes, denying the State revenue.
According to the KRA, some of the law firms are reducing their tax liabilities by claiming withholding tax credits without showing that the cash in their clients’ accounts earned interest and 15 percent withholding tax deducted by banks as the withholding agents.
Interest income attracts a withholding tax of 15 percent. Banks normally deduct the tax from the law firms’ accounts and remit it to the KRA. The same amount is then credited to the law firm’s iTax account which can be claimed when they are paying their taxes.
However, the KRA says it has noticed a trend where some law firms have been on perpetual VAT credit, forcing the taxman to audit the VAT credit in their iTax accounts.
“Some of the law firms have, therefore, been claiming the withholding tax credits against their tax liabilities (thereby reducing their tax liability) but without the corresponding declaration of the interest income,” the Commissioner for Domestic Taxes Rispah Simiyu told the Business Daily.
These assessments have inflamed the legal practitioners with the Law Society of Kenya (LSK) decrying what it termed as arbitrary tax assessments by the taxman against its members.
The Business Daily had earlier obtained correspondence in which the KRA was demanding tax details for a law firm dating back five years.
In the audit notice, the KRA queries the fact that since 2018 the law firm has been on perpetual value-added tax (VAT) credit, which means they don’t pay the tax as KRA always owes them.
The records the KRA wants from the firm for completing the verification include purchase invoices, sales invoices, bank statements, and monthly Electronic Tax Register (ETR) reports.
LSK president Eric Theuri faulted the current arrangement, noting that they have since asked the KRA to configure the system such that when a law firm pays tax on behalf of a client, the tax credit goes to the client.
“Because (under the current system) ... there is no way I can transfer a tax credit that is not mine to the client,” said Mr Theuri.
“What other people are doing is that they are paying over and above the credits that have been utilised,” said Mr Theuri, noting that this is why the accounts are continuously in extra credit. He explained that instead of the KRA taking into account this extra credit, they are still assessing the advocate for extra income and under declaration. “Which is wrong,” explained Mr Theuri.
But Ms Simiyu insists that the assessments were issued to recover the underpaid taxes from law firms that did not provide evidence that the interest income was earned from the client account deposits and distributed to the clients.
These assessments have pushed the LSK to ask its more than 20,000 members who feel harassed by the move to complain officially.
“The Council of the Law Society of Kenya is extremely concerned about the rising number of cases and complaints by the public, especially by Advocates, against the KRA in relation to arbitrary tax assessments and the failure by KRA to follow due process or laid down procedures under relevant tax laws in the execution of their mandate,” said Florence Muturi, the chief executive officer of the LSK in a notice to members.
It is a double tragedy for the legal practitioners who recently caved into pressure and agreed to be appointed as reporting agents in the fight against dirty cash, a move they had earlier fiercely opposed, arguing it would violate the “advocate-client privilege.”
President William Ruto’s government, which has an economic programme with the International Monetary Fund (IMF), is under pressure to reduce the country’s debt vulnerabilities and achieve the requisite debt to Gross Domestic Product (GDP) ratio of 55 percent by 2029.
Lawyers and high net-worth individuals are some of the taxpayers that the Treasury noted in one of its reports as those who have not been paying their fair share of taxes.