ALTERNATIVE TAX DISPUTE RESOLUTION FRAMEWORK Presented by J

ALTERNATIVE TAX DISPUTE RESOLUTION FRAMEWORK Presented by: J. W. Kamande (Mrs. ) DEPUTY COMMISSIONER CORPORATE TAX DISPUTE RESOLUTION DIVISION (CTDR) 17 TH JUNE 2015 e-mail – juliet. kamande@kra. go. ke www. KRA. go. ke

Scope Of Presentation 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 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 www. KRA. go. ke

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 22: 21 "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 www. KRA. go. ke

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 www. KRA. go. ke

Do you know this man? Alphonse Gabriel alias "Al" Capone www. KRA. go. ke

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” www. KRA. go. ke

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. www. KRA. go. ke

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 www. KRA. go. ke

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. www. KRA. go. ke

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) www. KRA. go. ke

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. www. KRA. go. ke

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. www. KRA. go. ke

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 Commissioner’s Technical Team • The Facilitation Panel • The Facilitator. www. KRA. go. ke

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. www. KRA. go. ke

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 www. KRA. go. ke

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. www. KRA. go. ke

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 unconducive 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. www. KRA. go. ke

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) www. KRA. go. ke

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 www. KRA. go. ke

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). www. KRA. go. ke

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. www. KRA. go. ke

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 www. KRA. go. ke

Signing of ADR Agreement • • Where parties to the dispute have agreed on terms; Agreement terms must be put into writing, signed by both parties/taxpayer’s 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. www. KRA. go. ke

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) www. KRA. go. ke

Implementation Strategy • For full implementation of the Framework various strategies must be put in place. www. KRA. go. ke

Review of the Framework • The Framework shall be reviewed from time to reflect changes in Law, Policy and other Regulatory Framework www. KRA. go. ke

SAMPLE OF 12 CASES BTWN KRA AND TP- OUTCOME & UNCERTAINTY TO BOTH TP/KRA? No. TAX PAYER YEAR FILLED AMOUNT 1. 2007 2. 2006 3. 2002 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. 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 12. 2011 529, 333, 839. 00 TOTAL 1, 377, 505, 229. 00 CURRENT STATUS Pending Appeal 1, 010, 000. 00 Pending Appeal 117, 000. 00 Pending Appeal 14, 787, 441, 994. 00 www. KRA. go. ke Under Receivership Pending Hearing

ADR IN SARS 2011 - 2014 www. KRA. go. ke

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 R 11, 178, 800 (27%) R 41, 303, 855 Total cases finalised by ADR/Litigation 357 (155%) 230 Average cost per finalized case R 31, 313 (17%) R 179, 582 www. KRA. go. ke

BEST PRACTICE COUNTRIES ON ADR, For best practice it is recommended that 80 % Tax Disputes should be under ADR, • COUNTRY *Canada ADR % 95% *Australia 85% *Brazil 75% South Africa 66% Kenya 36% *Source - USAID’s Leadership in Public Financial Management (detailed guidelines for improved Tax Administration in Latin America and the Caribean – 2013) www. KRA. go. ke

Court scene 1 www. KRA. go. ke

Court scene 2 www. KRA. go. ke

Court Scene 3 – A stressed Judge or thinking too hard? www. KRA. go. ke

ADR SCENE 1(ENVIRONMENT) www. KRA. go. ke

Is there a solution? www. KRA. go. ke

ADR scene 2 - Happy Ending! www. KRA. go. ke

Alternative Dispute Resolution Bill • This is a proposed Bill. Once it becomes Law KRA will review this to align it with the Law www. KRA. go. ke

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. www. KRA. go. ke

END OF PRESENTATION THANK YOU! www. KRA. go. ke