Finance Bill 2023 - Its proposal on tax dispute resolution

#Taxation is the art of balancing legitimate competing interests. The government need for revenue collection must be balanced with the need to incentivise the #taxpayer to pursue income generating activities. The tax agency(ies) desire for robust enforcement mechanism has to be countered by the constitutional protection of the right to property. Public needs meet private interests, national interest meet international commits, and international commits has to work in tandem with doctrine of reciprocity. And so goes on the dance of the parties in the taxation landscape.

There is no perfect #Finance_Bill or Act. Far from that, it's the stated art of the Finance Bill to cure the imperfection of existing taxation regime that often offer an oblique nod to the imperfections of tax laws. The #FinanceBill2023 is such an incongruity. By seeking to perfect the existing tax regimes, it has inadvertently been riddled with a few imperfections of its own.

Part III of the Finance Bill 2023

Section 35 of the Finance Bill seeks to perfect the appeal process at the Tax Appeals Tribunal ("the Tribunal") by allowing appellants to provide the appealable decision and any other relevant documentation. As it is, #Section35 provides for the substitution of Section 13(2)(c) of the #Tax_Appeals_Tribunal Act ("TAT Act") with a new provision. The change moves from the #Appellant providing the "#tax_decision" at 13(2)(c) and 13(2)(d) to an "#appealable_decision and any other relevant documents." The change is subtle but over due since not all tax decisions are appealable decisions as per the TAT. That is evident by dint of the proposal to introduce a Section 13(2)(9) that defines an appealable decision to be a defined under Section 3 of the Tax Procedures Act ("TPA")

Hence, by limiting the document to be filed to an "#appealable_decision" the amendment ensures clarity. As per proposed Section 13(2)(d), parties will enjoy some room to file any additional documentation that may have arisen and is essential for the determination of the dispute, even if the documentation had not been availed at the #Objection_stage of the tax decision. For tax payers who may have limited capacity during the objection stage to generate all requisite documentation, the proposal would allow for a more judicious approach at the Tribunal as all relevant material would be deemed admissible. The current approach by the Tribunal has been to disallow any "new or fresh" materials that were not available at the objection stage, even if such documentation has only become available after the objection decision had been issued.

Whereas Section 35 of the Finance Bill seeks to offer clarity and respite to stakeholders in the tax dispute resolution process, the proposal under Section 36 are cause for consternation for tax payers. We (Mr Khaseke Georgiadis, FCIArb Milcah Kerubo Manyara and I) had previously written on the legality of the proposal when it was first touted under Section 30 of the 2022 Finance Bill. In our June 2022 article, we explored on the intersectionality of the constitutional right to access to justice, the right to a fair trial and the right to property. In our summation, we were of the considered view that such a proposal was untenable and potentially unconstitutional impediment to taxpayer's right.

It is noteworthy that the focus on Section 32 of the TPA seems incessant and potentially inevitable. At a #policy_level, it appears the KRA views taxpayers appeals and objections to its decision as mere smokescreen to defeat revenue collection. By imposing a financial costs to appeals against the KRA appealable decisions, it would appear the KRA expects taxpayers to cave in and compromise their grievances. At a #commercial_level, the need for certainty and business operational needs may have the taxpayer compromise on what may be considered minor issues.

The view that the KRA views #objections and #appeals as detrimental to their operations is lent credence by the strong-arm tactics currently at play in the Excise tax sector. Often, taxpayers with #Excise_duty disputes are denied stamps until the dispute is satisfactorily addressed. Unless one seeks protection from the Courts, businesses have had to close some line of operations or their entire operations due to disputes with the KRA on Excise Duty issues. In the VAT arena, the KRA has simply adopted the approach of suspending the VAT Pin for the taxpayer, with ruinous consequences.

It would therefore appear that the KRA intends to extend the strong-arm tactics into scorched earth tactics in the entire gamut of tax enforcement mechanism. As canvassed in the earlier referenced Article, the approach will affect the operational financing of taxpayers with tax disputes and could erode all government efforts at stimulating private sector growth and development.

If the section is passed as proposed, it will inevitably attract vicious litigation amongst indignant taxpayers and a determined KRA. For #LargeTaxpayers the provision would be unpalatable on the face of the statute.

Part VI of the Finance Bill 2023

#Section44 of the Finance Bill proposes to expand the room for appeals to the TAT by deleting a #refund_decision from the definition of a tax decision. As it currently stands, a tax decision cannot be appealed against while an appealable decision can be appealed to the TAT. By deleting Section 3(f) on definition of a tax decision, the proposal would allow for refund decisions to be treated as appealable decision.

The proposal appears to be informed by the need to ensure the KRA's exercise of discretion in administering tax refund is now subject to appeal or review by the TAT. Given that large tax payers tend to have substantial tax refund claims, the deletion will allow taxpayers to contest a refund decision they perceive as unfair or unreasonable exercise of discretion. It is expected that there will be greater push for the KRA to adopt a more objective position when making refund decisions. Refund decisions can be broadly perceived as any determination made under Section 48 of the TPA that would result in refund of amounts paid to the taxpayer by the KRA.

#Section_45_and_49 of the Finance Bill ought to be read contemporaneously to allow for a full appreciation of the scope and extent of the proposed changes. Under Section 45, the Bill proposes to insert a #Domestication_Clause where any multilateral agreement on #mutual_administrative_assistance on tax matters. By dint of the proposed Section 6A(3), #multilateral_agreement on mutual administrative assistance on tax matters would be deemed to be domesticated and applicable as per their terms.

Given that Kenya is a dualist* state, Section 6A(3) if enacted would offer clarity on the route and mechanism for domesticating mutual administrative assistance modalities. (*While the debate goes on whether Kenya is monist or dualist, the existence of the Treaty Making and Ratification Act that provides for domestication mechanisms for treaties is prima facie evidence that Kenya is a dualist state).

Section 49 of the Finance Bill seeks to enact into law a comprehensive mutual administrative assistance mechanism ("MAA Mechanism") in tax matters. The proposals call for amendment of Section 32 of the TPA to introduce a Section 32A that sets out the procedure, mechanism, scope and extent of utilisation of mutual administrative mechanisms in Kenya. Quick item to note is the MAA Mechanism cannot be exercised against a non-resident of a requesting state if the tax due is under contestation (proposed Section 32(A)(3)).

For the KRA to pursue a MAA Mechanism, the Commissioner is to file an application similar in nature to Section 43 Applications (of the TPA) to the #High_Court for an Order. It is expected that if such a provision goes through, the proceedings would amount to quasi enforcement of foreign judgment and quasi preservation orders against the perceived liable party. It is at the High Court juncture that most litigation would centre on determining the proper liable party and the finality of the tax decision that the Commissioner's assistance has been requested under an MAA Mechanism.

Notably Section 32A(8) throws a wrinkle in the works by providing for Kenyan Law to also form as #substantive_tax_law in determining the liability due and owing. Such a provision, in my opinion, will be prejudicial on the finality of the tax due as stated by the requesting state. It also violates the express provision of some of the MAA Mechanisms that Kenya has signed with other states. The conflict of laws approach adopted by the High Court will be interesting to note (tax as a public administrative law issue) and may ported a back door expansion into the enforcement of foreign decisions in Kenya.

Section 46 of the TPA then turns to #duties_of_trustees. It imposes a duty to keep and maintain record on Kenyan residents acting as trustee, irrespective of whether the trusts are Kenyan, foreign or non-taxable domestically. The proposed amendment reflects the need to synchronise tax records to ensure Kenya can meet its obligations under MAA Mechanism on provision of records for its residents.

In recognition of the continuing push for #digitisation_of_tax_records, Section 47 of the Finance Bill seeks to formalise the utilisation of #electronic_tax_system. The proposed Section 23A empowers the Commissioner to establish electronic tax systems and for the regulation of such electronic tax systems. While no direct duty or liability arises from the proposal, it may be seen as an attempt to cement and legalise the Commissioner's push for electronic tax records and the management of such systems beyond the 2020 VAT (Electronic Tax Invoice) Regulations.

The digitisation crusade is further reflected in Section 60 of the Finance Bill that introduces a Section 59A to the TPA to govern #electronic_data_management and reporting systems. Under the proposed powers, the Commissioner would have the mandate for setting up a data management system and identifying specific taxpayers who would be obliged to provide detailed transactional data. From an operational dimension, the proposal would allow for utilisation of machine learning and data analytics in high risk areas where the revenue leakage are suspected or have been observed by the KRA.

To give teeth to the #digitisation_movement, Section 62 of the Finance Bill proposes to repeal the entire of Section 86 of the TPA and replace it with new provisions. The new provisions would eliminate the power of the Commissioner to require taxpayers to submit #electronic_tax_returns. In exchange, it limits the scope of #digitisation to that expressly provided by law but expands its applicability to tax returns, tax invoices and payment of taxes electronically. failure to comply with a law on digitisation would result in a penalty of Kenya Shillings One Million, or an amount equal to ten times of the tax due, whichever of the two is higher.

The punitive nature of the financial penalty (minimum of one million) will potentially force all small and micro enterprises to #adopt_digitisation irrespective of their current technical and operational capacity. Further, by removing the power of the Commissioner and reverting to legislation, the amendment will ensure that the punitive nature is not challenged under the ultra vires doctrine on subsidiary legislation that may have been promulgated by the Commissioner on digitisation.

The proposal under Section 48 of the Finance Bill to delete the word "original" in Section 31(6) of the TPA seeks to address the drafting slip in the Section. Similarly, the proposed amendment under Section 66 of the Finance Bill to substitute "and" with "or" in Section 104(1) of the TPA is a slip rule amendment. No liability or controversy is likely to arise from the change.

The entirety of Section 37 of the TPA is proposed to be #repealed_through_deletion as per Section 50 of the Finance Bill. The current Section 37 of the TPA provides for the KRA to abandon any tax enforcement measure where it's deemed that the collection of the taxes would be impossible, expensive or cumbersome. By removing the provision, the KRA discretion on when and which tax to pursue is eliminated. Any and all taxes will have to be vigorously sought and recovered, irrespective of the costs, difficulty or likelihood of recovering any tax.

The position appears to be an attempt by the current regime to rein in #abuse_of_discretion at the KRA. While political interference at the KRA has been previously cited for abuse or misuse of the discretion under Section 37, the blanket removal of the Section portends a policy shift at the KRA.

The imperfections of any tax legislation are laid bare by Section 51 of the Finance Bill. After deleting Section 37 at Section 50 of the Bill, Section 51 seeks to introduce a new Section 37E. If the entire Section 37 is repealed, shouldn't the proposal introduce a Section 37 and not 37E? Will we have a Section 37E, without any Section 37 A to D? Is the drafter aware or better informed that the repeal of Section 37 may not go through hence their sleight of hand by introducing a 37E if the repeal of 37 in its entirety fails? Drafting is an elegant art. Not in this case.

The proposed Section 37E(1) provides a #waiver of all interests and penalties due and owing from taxpayers who had paid the principal tax in dispute by end of 2022. The use of the word "shall" connotes mandatory terms, there is no #discretion on the Commissioner to grant waiver of the penalties or interest. However, Section 37E(2) proceeds to provides a fall back option for taxpayers with outstanding tax debts who are yet to clear the principal sum.

Under the proposed Section 37E(1) taxpayers may apply for waiver of penalties and interest accruing up to December 2022 if they proceed to enter into a payment plan for settlement of the principal tax owed. The principal tax must be cleared on or by 30th June 2024 to ensure the matter does not spill over to the next financial year. The proposal goes some way to providing #relief_for_taxpayers who may be saddled with tax disputes arising from the challenges of the 2020-2022 Covid Pandemic. Other taxpayers with longer running disputes also stand to benefit tremendously by wiping their penalties and interest on tax debts if they can arrange their affairs to remit the principal tax by the end of the 2023 financial year.

Section 52 of the Finance Bill proposes that the Commissioner is only obliged to inform the taxpayer after the registration of a security against their property for unpaid taxes. The existing regime under Section 40 of the TPA requires the Commissioner to inform the taxpayer within seven days after they write to the Lands Registrar for registration of a security over their property. Such an approach allows the taxpayer to contests the Commissioner's attempt to register the security and allows for the Registrar to make a determination based on the documents availed to them. Given that the Registrar's decision can be appealed, the removal of the right to notification prior to registration of the security creates a presumption of automation in the law. The moment the Commissioner notifies the Lands Registrar, the Registrar may proceed to register the security and only after registration will the taxpayer be informed.

The provision is #highly_objectionable as it violates the right to property in a manner that is egregious and potentially contra the Lands Act. It also creates the potential for misuse of the provision as a bargaining tool by the Commissioner who may wield the possibility of registering the security to nudge the taxpayer to a compromise that may not be in their best interest.

#Agency_Notices by the KRA to persons owing or holding money for the benefit of a taxpayer will have their scope expanded if the proposal under Section 53 of the Finance Bill comes into effect. Under the proposal, Section 42(14) of the TPA is amended to provide for more instances where the Commissioner may issue agency notices seeking to recover money from third parties who owe or hold money for or on behalf of a taxpayer.

Section 42A of the TPA is proposed to be amended by expanded the persons capable of being appointed as VAT withholding agents to include all manufacturers. As it currently stands, manufacturers who have invested over three billion in the preceding three years were exempt from designation as withholding VAT agents. By including them, the #compliance_burden will markedly increase for large scale manufacturers who will now have to contend with acting as withholding VAT agents. The move on one end seems intent on curbing the tax evasion route adopted by some traders and sealing reporting loopholes for large scale manufacturers.

Section 4B of Section 42A would be amended to require all withholding VAT agents to remit the collected VAT within three days of collection. Currently, the remittances are made in tandem with the monthly reporting of VAT, the proposal would potentially have regular payments on a rolling basis while retaining monthly reporting obligations. The outcome is an increased compliance burden on VAT withholding agents and the KRA duty to audit the record trail of the taxpayers.

Currently, Section 35 of the Income Tax Act allows the Commissioner to appoint withholding tax agents for rental income, the proposal under Section 55 of the Finance Bill replicates and donates the same powers to the Commissioner. Given there has been no challenge to the Commissioner's power under Section 35 of the Income Tax Act, the proposal is curious to say the least. Or it may be a drafting snafu.

With one stroke, Section 56 of the Finance Bill seeks to empower and disenfranchise the taxpayer with respect to overpaid tax. On one hand, Section 56 would allow taxpayers to offset any overpaid tax against outstanding, current and future liabilities. Such a development widens the scope for offsetting overpaid taxes to include outstanding tax debt. However, the amendment proceeds in Section 42(2) to allow the Commissioner to offset outstanding debts or hold the monies for payment of future tax debts.

Consequently, the Commissioner need not refund any monies to the taxpayer. By simply invoking the Section, overpaid taxes could offset current tax debts or be held on to offset future taxes. The requirement for the Commissioner to pay interest on overpaid tax if they are not refunded within a two year period is also eroded as the Commissioner may seek to rely on the amendments to the effect that such funds are held to be applied against future tax liability.

Section 57 of the Finance Bill falls into the category of #inelegant_draftsmanship. Section 51(4) would be amended to provide clarity on the way forward after the Commissioner determines an objection was not validly lodged. The proposal would be welcome to practitioners by allowing for a cure mechanism against a notice of objection that is deemed invalid by the Commissioner. However, the proposal then goes on to propose a Section 51(4A) that appears to conflict the provisions of Section 51(11) of the TPA. Whereas Section 51(11) is mandatory in its drafting, Section 51(4A) as proposed introduces an aspect of discretion by the use of the word "may" rather than "shall." Under the Golden Rule of statutory interpretation, it is possible that the apparent challenge could be resolved through statutory construction to the effect that the maximum period for an objection decision would be sixty (60) days, whether or not the additional documentation requested by the KRA for an invalid Objection Notice are provided within the proposed seven (7) days.

In an apparent acknowledgement of the current challenges faced at the #Alternative_Dispute_Resolution_Mechanism ("ADR") under the Tribunal auspices, Section 58 of the Finance Bill seeks to amend Section 55 of the TPA to extend the timelines for #ADR Resolution from ninety (90) days to one hundred and twenty (120) days. The additional thirty (30) days would be welcome to stakeholders to allow for more time for negotiation and resolution of any sticking point during the ADR sessions.

Section 59 of the Finance Bill seeks to fundamentally alter the substance of appeals to the Tribunal and the Courts by limiting taxpayers to the grounds contained in their objection. Whereas currently the Tribunal or the Court enjoys #discretion_under_Section_56 to allow parties to introduce a new or additional grounds to the ones contained in the Objection, the amendment eliminates the discretion. Effectively, tax agents and the taxpayer (who may be non-lawyer at the objection stage) will be bound by their pleadings for the entirety of the dispute resolution process.

Such a provision is objectionable on two grounds. Firstly, the attempt at limiting the discretion of the High Court on amending pleadings is likely to be frowned upon by the Courts given that non-lawyers practice at the Objection stage. The non-lawyers ignorance or unawareness of the rules of pleading may adversely affect a parties right to a fair trial and access to justice at the High Court and Court of Appeal. Secondly, by limiting parties to the provisions of their Objection Notice, the provision is likely to fall foul of the right to access to justice and to the right to a fair trial. When such an issue arises, it is likely that a constitutional question may have to be addressed by the Courts.

To penalise deliberate omission or misrepresentation of information to the KRA, Section 84 of the Finance Bill proposes to amend Section 84 of the TPA. As per the proposal, any tax shortfall that arises from deliberate acts would be punished by a penalty of 200% of the shortfall arising from the reporting. Such a proposal is a radical increase from the current 75% penalty imposed on offenders. The lack of data on the utilisation of Section 84 makes it difficult to ascertain the deterrence level of the proposal and may potentially turn out to be a paper tiger if the provision has had limited efficacy to date.

To further curb #abuse_of_tax_legislation, the Finance Bill at Section 63 seeks to repeal sub-section 6, 7 and 8 of Section 89 that allow for remission of penalty and interest. By removing the power of the Commissioner to hear and determine application for remission of penalties and interest, #RevenueLeakage through remission is expected to reduce. With limited scope for waiver of penalties and interest, the ADR Mechanism in tax disputes is likely to be compromised and parties will have limited lee way when negotiating settlements at the Tribunal.

The impersonation of an authorised officer in tax matters will be criminalised if the proposal under Section 64 is enacted as Section 97A. A person convicted of the offence of impersonation would be incarcerated for a period of up to three years.

To address the issue of forum shopping, Section 66 of the Finance Bill proposes to introduce a new Section 108(A). The proposal would allow for criminal proceedings to proceed contemporaneously with civil proceedings, even if the facts in issue in both matters is substantially the same. The current judicial approach where the issue of stay of proceedings is a matter of discretion would be tweaked and parties would now be free to argue that statute contemplates that both proceedings may proceed concurrently irrespective of the prejudice that maybe suffered if the separate judicial proceedings arrive at two competing (or potentially conflicting) factual findings based on the same factual matrix.

This is not a legal opinion or tax advisory. It is an opinion piece of the various issues brought up by the proposed Finance Bill.

For a tax advisory, kindly consult your respective tax agent. For legal advisory, do contact your counsel.