The burden of proof in tax disputes

Every week the trend has been that there is a tax dispute story in the newspapers and the question remains, is it that taxpayers are simply avoiding their tax obligations, or our tax laws are complex for easy compliance?

In the tax disputes reported recently, I find a curious case about the interpretation of tax laws.

First is the case of Suraya Property Group, where the KRA is demanding Sh2.9 billion. This case raises the question of whether the taxpayer or the taxman has the burden of proof in a tax dispute.

Suraya Group constructed 756 housing units and sold 695 units, with each unit sold for Sh30 million.

But the taxman claims the company provided only 330 sale agreements and that it, therefore, under-declared its gross turnover and failed to file income from the other unit sales and corporate income tax returns.

The Tax Appeals Tribunal ruled that the burden of proof is with the taxman and that the KRA should have used industry figures to review the tax compliance status of the Suraya Group. The High Court overturned the Tax Appeal Tribunal ruling and imposed the burden of proof on the taxpayer.

It is the taxpayer to prove that an assessment by the taxman is excessive or incorrect. The Tax Appeal Tribunal ruling was underwhelmingly unconvincing and the High Court was right to reverse it.

But there is need for caveat on the burden of proof being on the taxpayer because we have an overreaching taxman.

First, the taxman should be bound to demonstrate that there is a case of tax evasion because if it’s simply left entirely on the taxpayer, the taxman will abuse the law by arbitrarily fishing for tax assessments and arm-twisting taxpayers.

Ultimately, this will be to the detriment of effective tax compliance.

We have seen the taxman go after bank accounts of taxpayers even before a tax dispute case is built. An example is the case of the KRA against the Kenya Ports Authority (KPA) relating to a procurement project where the taxman is asking for Sh1.99 billion.

The taxman moved to freeze the bank accounts of the KPA before it responded to the objection of the tax assessment by the KPA as required by the Tax Procedure Act.

The other interesting case is that of Absa Bank Kenya against the KRA where the taxman argues that payments made by the bank to card companies constitute royalties and interchange fees paid by banks are classified as management or professional fees all liable to taxation and subject to withholding tax.

This case brings out the issue of why imposing the burden of proof on the taxpayer needs to be checked.

In 2015, the High Court ruled that the taxman did not clearly identify the category in which the demanded tax fell and so the taxman fell short of the clarity required in tax matters.

The court was simply saying that the taxman was out in a fishing expedition in its tax assessment and dismissed its case.

The taxman appealed the ruling at the Court of Appeal and the three judges bench ruled that payments made by the bank to credit card companies were royalty and subject to withholding tax.

The case has now moved to the Supreme Court and taxpayers should be keenly watching the ruling that will come from the apex court because it will have ramifications on how the taxman conducts itself when it comes to tax assessments.

Lastly, in the Finance Bill 2022, the Treasury has proposed that businesses with tax disputes deposit 50 percent of the disputed amount when they appeal to the High Court.

This is not only a preposterous proposal but also unconstitutional. If the National Assembly will pass this into law, it will definitely be challenged in court because it goes against fair administrative action.

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Note: The results are not exact but very close to the actual.