Many taxpayers have tax disputes with the KRA. It is important to know how to handle tax disputes because failure results in fines, penalties, interest, and possible jail time. Several taxpayers have suffered because they did not have the relevant information.
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What Are Tax Disputes?
Tax disputes arise when a taxpayer and the Kenya Revenue Authority (KRA) disagree regarding tax assessments, payments, penalties, or other compliance issues. These disputes can occur due to errors in tax filing, misinterpretation of tax laws, or disagreements over KRA audits and assessments.
When a tax dispute arises, taxpayers must handle it correctly to avoid penalties, interest accumulation, or legal action by the tax commissioner. Resolving tax disputes promptly ensures compliance and prevents disruptions to personal finances, business operations, and taxpayers’ lives.
Sources of Tax Disputes
There are many sources of tax disputes. However, tax disputes can arise from the following situations, including:
1. Incorrect Tax Assessment
The KRA assesses taxpayers based on information provided by the taxpayer or through tax audits. The tax commissioner may assess a taxpayer who feels that the liability is incorrect, which may lead to disputes over the tax amount assessed.
2. Late or Non-Filing of Returns
Taxpayers are expected to file monthly or annual tax returns. Failing to file tax returns on time may result in fines, penalties, and interest charges. The taxpayers may dispute this.
3. Failure to Declare All Income
Some taxpayers fail to declare all the income they have derived or xxx from Kenya. Additional tax will be imposed if the KRA identifies undeclared income through tax audits. The taxpayers will be required to pay. They can dispute the amount if they disagree with the additional tax assessed.
4. Tax Audit Disagreements
The tax commissioners audit both Individual and non-individual taxpayers. When taxpayers are not satisfied with the audit results, they may contest the KRA’s findings, which may result in tax liabilities.
5. Deduction and Relief Disputes
Under the tax laws, taxpayers are entitled to allowable deductions and reliefs to assist them in managing their tax liabilities. Differences in interpreting allowable deductions and reliefs may lead to disagreements with the KRA.
6. Customs and Import Tax Issues
There are tariffs and customs duties that apply when exporting and importing goods and services. Sometimes, importers and exporters may dispute the classification of goods, applicable tariffs, and customs duties.
7. Transfer Pricing Disputes
Multinational corporations have subsidiary offices all over the world. They may also trade with related companies. Transactions occur across the offices. The prices charged are transfer prices. When the tax commissioner audits multinational corporations, issues about transfer pricing may arise. Multinational corporations may disagree with the KRA over pricing methods for goods and services traded between subsidiaries or with related companies.
8. VAT and Excise Duty Disputes
In Kenya, There are consumption taxes, such as VAT and Excise Duty. Individuals and non-individual taxpayers may dispute and contest assessments related to Value-Added Tax (VAT) and excise duty on goods and services.
9. Tax Penalties and Interest Charges
When taxpayers are late filing tax returns, remitting taxes, and performing many other acts that may be considered tax non-compliance, they will be penalised. The tax commissioner will levy fines, penalties, interest, or jail time imposed due to late payments or non-compliance. The taxpayers may dispute this.
10. Tax Exemptions and Incentives
Taxpayers have the right to tax exemptions and incentives. However, they must qualify and apply. When taxpayers fail to qualify for these benefits, they may dispute KRA’s rejection.
Process for Resolving Tax Disputes with KRA
If you find yourself in a tax dispute with the KRA, following the correct procedures to resolve the issue efficiently is essential. There is no tax dispute that cannot be resolved. The following are some steps that you can follow to handle tax disputes with the KRA:
Step 1: Review the Tax Assessment or Issue
Carefully review the KRA tax notice, dates, assessment amounts, or audit report. This will help you understand the nature of the dispute. Verify the accuracy of the calculations, the declared income, the tax deductions and reliefs, and any penalties imposed.
Step 2: Gather Relevant Documents
Collect all necessary records and documentation related to the dispute to support your case. The following are some of the records and documents that you may need to gather:
- All tax returns and payment records
- Business financial statements for all the years of income
- Tax invoices and receipts
- Contracts, agreements, and tenders
- Audit reports by the KRA or external auditors
- All communications with KRA – previous and current
Step 3: Engage a Tax Consultant or Advisor
If you cannot handle tax disputes, you can engage a tax consultant or advisor. Consulting a tax expert can help you understand your obligations and rights, assess the validity of KRA’s claims, and determine the best approach to resolving the dispute.
Step 4: File an Objection with KRA
If you disagree with the KRA’s assessment, you have the right to file a formal objection through the iTax portal. This is referred to as a Notice of Objection. Some of the items that the notice should include are:
- A detailed explanation of the dispute
- Supporting documents
- Correct tax calculations (if applicable)
- Any relevant legal provisions supporting your claim
Step 5: Await KRA's Response
Once you have lodged the Notice of Objection, the KRA is required to respond to objections within specific timeframes of the current 60 days (note this may change). The tax commissioner may accept your objection in full, partially accept it, or reject it.
If the dispute is resolved at this stage, you can proceed with payment adjustments if necessary. If the dispute is partially resolved or fully rejected, the taxpayers have a right to seek resolution of the dispute at the Tax Appeals Tribunal at the Judiciary.
Step 6: Appeal to the Tax Appeals Tribunal
If the KRA rejects your objection partially or in full, you can escalate the matter to the Tax Appeals Tribunal (TAT). The tribunal is an independent body that hears tax dispute cases and makes legally binding decisions. There are several steps that you will need to follow.
Step 7: High Court, Court of Appeal, and Supreme Court (If Necessary)
If you, as a taxpayer, are dissatisfied with the Tax Appeals Tribunal’s decision, you can appeal to the High Court. If still dissatisfied, if necessary, you can go to the Court of Appeal and then the Supreme Court.
Step 8: Negotiate for an Out-of-Court Settlement
In some cases, taxpayers and KRA may negotiate an out-of-court settlement to resolve disputes amicably without prolonged litigation. This is done through Alternative Dispute Resolution (ADR).
Consequences of Failing to Resolve Tax Disputes on Time
Disputes are to be resolved. If tax disputes are not addressed promptly, taxpayers may face many problems. The following are some of the consequences:
1. Accumulation of Penalties and Interest
Delayed resolution of disputes results in increased interest on unpaid taxes. Tax interest is imposed monthly.
2. Legal Action
Failure to resolve tax disputes may result in the KRA initiating legal proceedings against the taxpayer. This may result in additional legal costs, stress, and potential asset seizures.
3. Business Disruptions
Tax disputes can disrupt business operations. Taxpayers with unresolved tax disputes may experience disruptions. For example, the KRA may freeze the taxpayers’ accounts or suspend tax compliance certificates, making it difficult for them to operate.
4. Denial of Tax Compliance Certificate (TCC)
In Kenya, a tax compliance certificate is required for various transactions. Without a TCC, taxpayers may not be able to transact in many cases. For example, taxpayers cannot bid for government contracts or tenders or obtain operating licenses.
5. Increased Tax Scrutiny
By the time a taxpayer has tax disputes, the KRA has already focused on them. Unresolved disputes may trigger further tax audits and investigations from the KRA.
6. Seizure of Assets
Unresolved tax disputes may result in uncollected tax liabilities. Under the Tax Procedures Act 2015, the KRA has the power to seize and auction assets to recover unpaid taxes from any taxpayer.
7. Restriction on Business Operations
Businesses with outstanding tax disputes may be blacklisted or denied essential government services. For example, when a business does not have a tax compliance certificate, it may not be able to transact in numerous situations.
8. Criminal Charges
When the KRA undertakes an investigation and finds that the taxpayer has not been tax compliant and the dispute is not resolved, the taxpayer may be taken to Court. In extreme cases, tax evasion-related disputes can result in criminal prosecution.
9. Reputational Damage
Tax disputes can harm the credibility of individual and non-individuals taxpayers. His can adversely affect their investing confidence and financial stabilit
Tips to Avoid Tax Disputes
There are many steps that taxpayers can take to avoid tax disputes. The following are some of those steps:
a. Ensure Timely Filing of Tax Returns—Submit all tax returns, monthly or annually, before the deadline to avoid disputes related to late tax filing.
b. Maintain Accurate Financial Records – Keep detailed records and documents of income, expenses, and tax payments.
c. Stay Informed on Tax Laws—Regularly update yourself on changes in tax rules, regulations, and laws. This will help you stay in compliance.
d. Engage Tax Professionals—Hiring a tax consultant, advisor, expert, or lawyer can help ensure accurate tax reporting and compliance.
e. Respond Promptly to KRA Notices—If you receive any queries from KRA, it is important to address them promptly to prevent the disputes from escalating.
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