Recently in the media, there have been high profile tax disputes between the Kenya Revenue Authority (KRA) and some big corporates.
These disputes involved colossal sums of money and for that reason, the outcomes of these cases are significant because the judgments may set a precedent for such disputes in the future.
The taxman has issued a stern warning stating that it would stop at nothing in recovering Sh250 billion “tax cheats” owe it. To recover the money, it has promised more prosecutions and administrative actions. The number of tax disputes is expected to rise due to an increasingly aggressive and sophisticated approach by the revenue authority.
This is not unique to Kenya. It is a trend seen worldwide due to greater co-operation between different tax authorities as well as advanced information technology facilitating deeper and faster investigations.
The effects of a tax dispute include negative public exposure. Trade secrets, which form part of the company’s intellectual property, are also at stake. Business rivals could exploit them to their advantage. It’s also costly to manage a tax dispute in public.
The expenses include not only legal fees but also cost associated with repairing a damaged public image. Worst of all is the loss of a social licence. When a company or a business entity is perceived as a tax cheat, it loses its social licence, meaning that it potentially loses it its customer base and the operational costs go up as it tries to regain acceptance.
Therefore, how does a company avoid pressing panic buttons when the taxman shows up and present a case against it? A strategy established within a business entity is important to avoid tax disputes. In case they arise, provide for a systematic and well-informed strategy of dealing with it.
Why tax disputes arise
The most probable cause of a dispute is a disagreement of the right amount of tax due under the law or when it is due.
Dealing with tax disputes
Tack and diplomacy is a great formula of dealing with tax disputes, either during the pre-dispute period or the dispute period.
Diplomacy is a mindset while tack is a strategy. To prevent a tax dispute, companies may consider the following tactics:
1. Record keeping
Taxpayers are often given a few working days to present any information the taxman seeks.
Ensure accounting, record keeping and controls are in order. Reviewing the record-keeping processes and controls to identify any potential areas of non-compliance and ways to mitigate the issues and exposure your business may face before a tax audit is the key to business survival.
2. Have a communication strategy
Studies on fiscal psychology show that tax compliance relies on two essential dimensions — the power of tax authorities and trust on fiscal institutions.
Trust shapes voluntary compliance and co-operation between taxpayers and the taxman. Executives should establish a sound communication channel between the business and the tax authorities.
This also makes the business entity aware of regulatory risk and manage it appropriately.
3. Seek rulings
One of the most effective ways of avoiding a tax dispute is by obtaining a binding ruling from the taxman.
This is an agreement between the revenue authority and taxpayer as to how the law applies in taxation. It ensures predictability.
Essentially, business, as well as individuals, should be alive to the fact that taxman may not always pursue issues amicably.
Different interpretations of the law may cause a business’s tax planning activities to attract the authority’s attention.
Dealing with a tax dispute is never fun.
Most taxpayers are simply trying to get on with running their businesses and dealing with their tax affairs as best they can.
Upon a dispute arising, then the tack deployed should be defensive. It is advisable to avoid litigation.
This is because of the publicity that robs the taxpayer of the opportunity of dealing with the case discretely, the time it takes to settle the dispute and the cost.
Alternative dispute resolution mechanisms are available to parties in the dispute as recognised in the KRA’s Alternative Dispute Resolution Framework.
In resolving the tax dispute, a business should realise that in their pursuit of protecting their legitimate interest, they are dealing with human beings representing the tax authority.
Their legal mandate is enshrined in the law and social, political and economic setting in the society.
This is the next and equally important tool in dealing with tax disputes.
It is fair to say that, the experience of dealing with revenue authorities during a tax dispute can be heavily influenced by the officer in charge of the issue. While some adopt an officious approach, most are ordinary people doing their job in good faith.
They may need help to understand the taxpayer’s business and the arrangements that are the subject of dispute.
Many disagreements can be resolved by calmly and unemotionally explaining the nature of the tax arrangements, how and why they were entered into and demonstrating that the taxpayer’s obligations have been met.
A hostile approach is usually unhelpful and will only serve to build a level of distrust and suspicion.
A well-informed approach to dealing with tax disputes could be a well-needed lifeline to business as tax disputes not only prove costly but also damage the social perception of the business and its executives in the society.
This effectively leads to a loss of the social licence which may be harder to recover. Nothing beats preparedness in dealing with tax disputes.
The writer is advocate of the High Court of Kenya.