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ALTERNATIVE TAX DISPUTE RESOLUTION FRAMEWORK

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Title: ALTERNATIVE TAX DISPUTE RESOLUTION FRAMEWORK


1
ALTERNATIVE TAX DISPUTE RESOLUTION FRAMEWORK
  • Presented by J. W. Kamande (Mrs.)
  • DEPUTY COMMISSIONER
  • CORPORATE TAX DISPUTE RESOLUTION DIVISION (CTDR)
  • 17TH JUNE 2015
  • e-mail juliet.kamande_at_kra.go.ke

2
Scope Of Presentation
  • Introduction
  • Alternative Dispute Resolution (ADR) - What is
    ADR? and
  • Why ADR? (Benefits/Objectives of ADR)
  • Purpose of ADR Framework
  • Is ADR anchored/backed by Law?
  • Who should initiate ADR? When does ADR kick in in
    the cycle of a Tax Dispute
  • Internal governance structures and roles of the
    parties in ADR discussion's.
  • ADR Timelines
  • Termination of ADR discussions.
  • Can all Tax Disputes be settled under ADR?
  • ADR Agreement terms
  • Reservation of Rights during ADR discussion
  • Second ADR attempt
  • Signing of ADR Agreement and its binding effects
  • Challenges

3
Principle of Equity in Taxation
  • The principle of equity in Taxation which is now
    anchored in the Kenya Constitution 2010
    underscores that every taxable citizen must pay
    taxes and that everyone must pay their fair share
    of the taxes.
  • Article 201 (a) (i) The burden of taxation must
    be shared fairly
  • Mathew 2221 "So give back to Caesar what is
    Caesar's, and to God what is God's.
  • Benjamin Franklin, (President of America 1705
    1790) said Our new Constitution is now
    established, and has an appearance that promises
    permanency but in this world nothing can be said
    to be certain, except death and taxes.
    www.freakonomics.com

4
Why then do disputes arise?
  • Disputes may arise for various reasons
  • Issuance of additional assessments, basis of an
    inclusion of any amount, the exclusion of any
    amount or any other decision by the Commissioner.
  • An interpretation of facts involved in any
    dispute, or the law applicable or both.
  • Rights in a dispute include, objections and
    appeals (quasi judicial bodies) or litigation in
    a Judicial process
  • Source Revenue Statutes

5
Do you know this man? Alphonse Gabriel alias
"Al" Capone
6
  • The People vs. Al Capone
  • Al Capone, head of the most profitable crime
    syndicate of the Prohibition Era and mastermind
    of the notorious 1929 "Valentine's Day Massacre,"
    seemed above the law. In the end, however, Capone
    would be brought to justice not for murder,
    extortion, or bootlegging, but for failing to pay
    his income tax. Credit for his conviction is due
    less to Elliot Ness and The Untouchables than to
    the dogged work of Bureau of Revenue investigator
    Frank Wilson and a clever surprise pulled by a
    federal judge, James Wilkerson. Al Capone once
    complained about the bad reputation of his
    criminal enterprise "Some call it bootlegging.
    Some call it racketeering. I call it a business."
    The lesson of The People vs. Al Capone is that a
    profitable businessman, no matter how he earns
    his income, does have to pay his taxes.
    www.fbi.gov
  • The lesson above is mirrored in Income Tax Act
    Cap. 470
  • Section 3(1) which provides Subject to, and in
    accordance with this Act, a tax to be known as
    Income Tax shall be charged for each year of
    income upon all the income of a person, whether
    resident or non resident, which accrued in or was
    derived from Kenya

7
What is Alternative Dispute Resolution (ADR) in a
Tax dispute?
  • It is an alternative method of handling tax
    disputes outside
  • The Judicial process (Courts of law)
  • The Quasi Judicial Process (Tribunals)
    www.law.cornell.edu.com
  • It is an internal mechanism to expedite
    resolution of tax disputes.
  • ADR settlements must have their legal basis
    within the Revenue Statutes.

8
Why ADR - What are the Benefits of ADR?
  • Expedited resolution of tax disputes (value for
    money today)
  • Decrease cost of dispute resolution viz
    litigation, (cost effective)
  • Enhance and manage relationships between KRA and
    TP (Non-adversarial)
  • Improve service delivery (Trust and Facilitation)
  • Enhance customer satisfaction (improve
    compliance).
  • Confidentiality (away from the glare of the
    public/business competitors

9
What are the Objectives of this Framework?
  • Provide a taxpayer focused approach to dispute
    resolution.
  • Provide internal structures and processes which
    will support tax dispute resolution through
    oversight, monitoring and management of the ADR
    processes,
  • Provide for the creation of a central database
    on tax disputes handled in ADR to guide future
    dispute resolution for consitency,
  • Provide for the rules of conduct for the
    parties during the ADR discussions.
  • Provide for timelines for resolving tax
    disputes so as to bring efficiency to the
    process,
  • Provide an additional approach for dispute
    resolution to compliment the existing internal
    dispute resolution mechanisms provided in the
    Revenue Statutes.

10
Is ADR anchored/backed by Law?
  • Constitution of Kenya, 2010 Article 159 (2) (c)
  • Revenue Statutes (the Commissioner may engage ADR
    at the review of an objection before
    confirmation),
  • The Tax Appeal Tribunal Act - TATA (Sec. 28)
  • Tax Procedure Bill Clause 55 (Tax Procedure Act,
    Section 55)

11
Who should initiate ADR and when does ADR kick in?
  • ADR is voluntary and either the Taxpayer
    (TP) or the Commissioner can initiate ADR and it
    can kick in at any stage of a dispute where a
    party to the dispute desires to engage ADR
  • Within the timelines provided in the Revenue
    Statutes for making a decision on the objection
    (Value Added Tax Act and East Africa Community
    Customs Management Act, the Tax Procedure Act and
    in the Income Tax Act (within 60 days as per
    internal guidelines).
  • When a dispute is before a Court of Law or
    Tribunal Either party can initiate ADR (see
    statutory deadlines for Concluding discussions
    Re Clause 55 of Tax Procedure Bill.

12
External Stakeholders and their Roles
  • KRA recognizes that the success of ADR depends on
    close working relationship with external
    stakeholders, who include
  • Tax Consultant/Legal Advisors
  • The Courts/Tax Tribunals
  • Professional Bodies.
  • Government Agencies (i.e. The Attorney General,
    the Director of Public Prosecutions and
    Commission for Administrative Justice.

13
KRA Internal Structures and Roles
  • For the success of ADR process, there must be
    strong structures to provide oversight to the
    process.
  • The Commissioner General
  • Corporate Tax Dispute Resolution Division (CTDR),
  • The ADR vetting team
  • The Taxpayer and his Agent/Consultant,
  • The Commissioners Technical Team
  • The Facilitation Panel
  • The Facilitator.

14
Independence, conduct and rules to guide parties
to ADR
  • ADR Discussions must be held within an
    environment of decorum, flexibility and parties
    must subscribe to standards of conduct and
    rules.

15
What are the ADR timelines?
  • One of the benefits of ADR is that it is a
    quick/faster way of resolving tax disputes,
  • ADR Timelines at the Objection Before
    Confirmation
  • Within timelines in the VAT Act and EACCMA for
    settling of objections and in the Income Tax Act
    within 60 days (Administratively)
  • ADR Timelines in a Case pending Before the
    Tribunal/Court
  • 90 days as in Clause 55 of Tax Procedure Bill
    (Section 55 TPC Act)
  • Tribunal Court initiated ADR - dependent on Court
    deadlines given

16
Documentation in disputes under ADR discussions
  • ADR settlements must have their legal basis
    within the Revenue Statutes.
  • Although ADR discussions are meant to be simple
    and less cumbersome compared to litigation a
    dispute must be supported by relevant
    documentation.

17
Under what circumstances can an ADR hearing be
terminated?
  • Just as ADR is voluntary, a discussion can be
    terminated.
  • If a party or both parties fail to attend the ADR
    meeting without reasonable cause after he has
    been served.
  • Conduct by one or both parties which may be
    un-conducive for ADR,
  • Where both parties agree to terminate the
    proceedings.
  • If a party fails to carry out a reasonable
    request by either the Facilitator or the other
    party.

18
Can all Tax Disputes be settled under ADR?
(suitability)
  • Not all cases are suitable for ADR and both KRA
    and the tax consultant would need to guide the
    taxpayer
  • Disputes Appropriate for ADR (factors to consider
    to justify dispute is appropriate for ADR)
  • Dispute inappropriate for ADR (factors to
    consider to justify that a dispute is not
    appropriate for ADR)

19
ADR Agreement Terms
  • An ADR Agreement should contain the following
  • Issues resolved and issues not resolved
    (justification)
  • Amount of Tax recoverable/Not recoverable
    (justification)
  • Withdraw of any proceedings pending before a
    Court of Law/Tribunal/issue of costs.
  • If ADR is reached at the objection stage
    terms?.
  • Where no agreement is reached, (justification)
  • Undertakings by each party
  • Mode of payment/payment plans by the Taxpayer

20
Reservation of Rights during ADR discussion
  • Rights of parties as provided by the Law are
    reserved in ADR proceedings until the conclusion
    of the discussions (whether consensus is reached
    or not).

21
Second ADR attempt permissible?
  • To avoid abuse of the ADR Process to delay
    determination of a tax dispute, there will be
    only one ADR attempt
  • However, if new material evidence is available
    which if produced would assist unlock the dispute
    parties may agree to engage ADR and the timelines
    remain the same.

22
Alteration/Amendment of Assessment on Signing of
ADR Agreement
  • The Commissioner shall alter/amend an
    assessment to give effect to the settlement terms
    after the agreement has been signed.
  • Any altered/amended assessment shall not be
    subject to an objection and appeal or any other
    litigation except
  • to correct an arithmetical error,
  • an error on the face of the assessment or,
  • to the extent that the content of the altered
    assessment is not in line with the terms of the
    signed agreement

23
Signing of ADR Agreement
  • Where parties to the dispute have agreed on
    terms
  • Agreement terms must be put into writing, signed
    by both parties/taxpayers agent and witnessed by
    the Facilitator.
  • Each party to retain a copy of the signed
    agreement
  • Signed agreement shall be in full final
    settlement and shall be binding to both parties.
  • Agreement can be produced as evidence.

24
Records, Data and Approvals (internal to KRA)
  • Documentation is important in ADR discussions and
    both the Commissioner and CTDR must
  • maintain records/data of all disputes handled
    under ADR.
  • Revenue foregone/Revenue collected /estimated
    cost of savings
  • The Commissioner to notify the Auditor General
    of any revenue foregone giving justification.
    (Article 210 (2) (a) (b)

25
Implementation Strategy
  • For full implementation of the Framework various
    strategies must be put in place.

26
Review of the Framework
  • The Framework shall be reviewed from time to time
    to reflect changes in Law, Policy and other
    Regulatory Framework

27
SAMPLE OF 12 CASES BTWN KRA AND TP- OUTCOME
UNCERTAINTY TO BOTH TP/KRA?
No. TAX PAYER YEAR FILLED AMOUNT CURRENT STATUS
1. 2007 1,377,505,229.00 Pending Appeal
2. 2006 1,010,000,000.00 Pending Appeal
3. 2002 117,000,000.00 Pending Appeal
4. 2005 2,574,747,385.00 Pending Hearing
5. 2008 442,205,324.00 Pending Appeal
6. 2003 364,054,006.00 Pending appeal
7. 2005 206,000,000.00 Pending hearing
8. 2011 5,620,730,161.00 Pending Appeal
9. 2007 124,720,037.00 Pending hearing
10. 2007 906,656,082.00 Concluded. Cannot collect (company went under).
11. 2009 1,514,489,931.00 Under Receivership
12. 2011 529,333,839.00 Pending Hearing
TOTAL 14,787,441,994.00
28
ADR IN SARS 2011 - 2014
29
FINANCIAL BENEFITS FOR SARS - COST EFFECTIVENESS
FOR ADR
ITEM Estimated Settlement Costs (ADR Unit) Estimated Litigation Costs (SARS In-House Lawyers Counsel)
Total Salary Cost plus Counsel fees R11,178,800 (27) R41,303,855
Total cases finalised by ADR/Litigation 357 (155) 230
Average cost per finalized case R31, 313 (17) R179,582
30
BEST PRACTICE COUNTRIES ON ADR,
For best practice it is recommended that 80
Tax Disputes should be under ADR,




COUNTRY ADR
Canada 95
Australia 85
Brazil 75
South Africa 66
Kenya 36
Source - USAIDs Leadership in Public Financial Management (detailed guidelines for improved Tax Administration in Latin America and the Caribean 2013) Source - USAIDs Leadership in Public Financial Management (detailed guidelines for improved Tax Administration in Latin America and the Caribean 2013)
31
Court scene 1
32
Court scene 2
33
Court Scene 3 A stressed Judge or thinking too
hard?
34
ADR SCENE 1(ENVIRONMENT)
35
Is there a solution?
36
ADR scene 2 - Happy Ending!
37
Alternative Dispute Resolution Bill
  • This is a proposed Bill. Once it becomes Law KRA
    will review this to align it with the Law

38
Challenges Expected in ADR discussions
  • Parties adopting hard line approach
  • instead of a win-win,
  • Failure to provide a legal justification to
    support a dispute.
  • Technical complexity of a dispute
  • Dishonesty by the parties
  • Failure to adequately document a dispute (lack of
    documentary evidence)
  • Failure to adhere to timelines hence delay
  • Delayed approvals from Treasury of waiver and
    penalty applications.

39
END OF PRESENTATION
  • THANK YOU!
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