Personal Finance

How alternative tax dispute resolution helps business

conf

Alternative dispute resolution has played a key role in reducing the backlog of cases at the tribunal. FILE PHOTO | NMG

As the name suggests, alternative dispute resolution is an alternative to litigation, which was the only tax row settlement mechanism in Kenya for a long time.

Alternative dispute resolution for tax disputes was rolled out in June 2015 to complement litigation by providing flexibility and timely settlement of tax disputes. Since its roll-out, it has seen an increase in expeditious settlement of rows. For instance, in the 2018/19 fiscal year, 213 disputes with a total value of Sh8.1 billion were resolved through alternative dispute resolution.

Alternative dispute resolution draws its legitimacy from the Constitution, Tax Procedures Act, Tax Appeals Tribunal Act and Kenya Revenue Authority (KRA) framework. The Constitution provides that in exercising judicial authority, courts and tribunals shall promote the use of alternative forms of dispute resolution, including mediation and arbitration.

The ADR process takes the form of facilitated mediation moderated by a member of the KRA’s Corporate Tax Dispute Resolution Department. The department’s team is drawn from tax experts with a wealth of experience in handling tax matters within KRA.

While the team appears to be independent in execution of its mandate, the fact that they are employees of the KRA casts doubt on their actual autonomy and undermines confidence in their impartiality.

Alternative dispute resolution may be initiated by either the taxpayer or the KRA. This could be done any time after the appeal has been filed at the tribunal but before the closure of the case. Once alternative dispute resolution has commenced, the proceedings at the tribunal are paused (“stayed” in legal parlance) for 90 days to give room for negotiations. The parties may continue to negotiate even after the lapse of the 90 days, provided they record a consent with the leave of the tribunal before judgement is delivered.

The alternative dispute resolution mechanism provides various benefits, not available in litigation, to the parties. First, the alternative dispute resolution process is expeditious and saves the parties considerable time.

The negotiations should commence and be concluded within 90 days. However, the parties may with reasonable grounds apply to the tribunal for an extension of this period.

Additionally, once consent has been recorded before the tribunal, there can be no appeal on the substance of the consent. This means that unlike litigation where there are three possible levels of appeal, the time spent on the alternative dispute resolution process is limited to a single level.

Second, the alternative dispute resolution process is relatively cheaper than litigation. The legal fees paid to advocates and tax consultants is lower than the cost of litigation. Additionally, since there are no appeals where a settlement is reached, the parties save on the costs, which would have been incurred in the appeal process.

Moreover, besides negotiating the taxes payable, taxpayers can also negotiate a payment plan for the taxes conceded that may not be possible in the litigation mechanism.

Third, the alternative dispute resolution process is more efficient in handling issues relating to facts and reconciliations.

The taxpayer is accorded an opportunity to explain the facts and numbers to KRA’s audit team who have experience in dealing with numbers and reconciliations.

This is done under the guidance of the moderator, who directs the negotiations from an objective perspective.

In litigation, tribunal members and judges may not have a good understanding of accounting concepts and reconciliations, which places the parties at a disadvantage where these form the core issues.

Fourth, the taxpayer has control over the process and outcome since the alternative dispute resolution agreement is only binding when signed by both parties.

The negotiations are conducted on a “without prejudice” basis, meaning that any admissions made by either party cannot be subsequently used against them before the tribunal or the court, should the alternative dispute resolution process fail.

The proceedings are private and the specifics not disclosed to the public, which promotes privacy and ensures the confidentiality of the taxpayer’s information and affairs.

However, alternative dispute resolution is not suitable for all cases neither is it always the best dispute resolution mechanism. For example, it would not be appropriate where the issues involved relate to interpretation of the law, where a settlement would be contrary to the provisions of any existing law, where it is in the public interest to have the issues clarified in the judicial system and where the non-compliance was deliberate on the part of the taxpayer.

Alternative dispute resolution has played a key role in reducing the backlog of cases at the tribunal.

There is a need to strengthen the alternative dispute resolution framework to accommodate more cases and to enhance and secure the independence of the Corporate Tax Dispute Resolution Department members who undertake the mediation process.

There is also a need to sensitise taxpayers more on the benefits of alternative dispute resolution, noting to highlight that the process takes into account business realities, which may not be relevant considerations in the litigation process.

The writers are advocates at KN Law LLP.