How a Company's Failure to Keep records has attracted a KES 3.8B tax bill

Case Study: Nakuru Cement Supplies Limited Vs KRA

KRA???issued?a??Notice??under??Section??59(1)?of?the??Tax Procedures?Act, 2015_ dated??26th May,?2016 conveying?its intention to commence an investigation??or audit?into NCSL's?tax?affairs on 14th June?2016 and?further??requiring?NCSL to?provide??certain documents.?The investigations commenced??with a meeting between NCSL and KRA on 14th June 2016.

During the investigations,??it was established??that ??NCSL had not been filing Corporate Tax returns since 2011 and thus was advised to do so. NCSL complied with the directive and filed its Corporation Tax returns on 4th November 2016 and KRA then proceeded with further investigations.

KRA issued its audit/investigations??findings vide a letter dated 11th July 2017 and??requested?NCSL to?reconcile?the variances?by showing?how they?have accounted for the discounts/credits.

NCSL objected to the findings vide a letter dated ??14th July 2017 and ??further?requested?for a review?of the whole?audit/verification??of the findings. Upon??receipt of the said objection letter, KRA wrote to NCSL inviting them for a meeting?on Thursday?20th July 2017 to?look?into the issues raised. NCSL did not?attend?this meeting nor did it respond?to the letter?either.

KRA???proceeded???to???issue???tax???assessments???totaling Kshs.3,833,386,522.00 on account?of Value Added Tax and Corporation Tax for the years?2011 to?2015?upon?NCSL vide?a letter?dated 14th August 2017.

Dissatisfied with?the?assessment, NCSL filed its Objection?to the above?assessments vide a letter dated?15th September,?2016. Upon?receipt of the letter of objection, KRA wrote?to NCSL on 22nd September?2017 informing?them that?they did not provide the necessary supporting?evidence?being the purchases and sales ledgers to enable them process the Objection.

KRA therefore granted NCSL 14?days?to??provide?the??necessary??documentation?in?support??of?its Objection.

On?12th?October,?2017,?NCSL sought?a?30-day??extension?to provide?the?required?documents and?information??but was only granted 10 more?days. KRA was of the view that?a 30-day?extension was?impossible?as it would?surpass the?statutory?timeframe??of 60 days under?which?an objection must be heard?and determined.

In the absence?of a response?from?NCSL,?KRA issued its Objection?Decision??dated???10th?November?2017,??confirming???its assessment and demand for VAT of Kshs.209,586,648??and??Corporation Tax of Kshs.3,623, 799,873?for the years 2011-2015.

Aggrieved?by the?Objection??Decision, NCSL lodged?an appeal to TAT

NCSL averred that KRA sourced information??from ??third party suppliers.??An?analysis?of??this??information?revealed??that??NCSL had received?discounts/rebates/credits???or bonuses on purchases made from these third party suppliers, whereupon vide a letter dated?17th May?2017, KRA called?upon?NSCL?to?provide??a reconciliation???on?how??the?discounts/rebates/credits?or?? bonuses??were accounted for. This letter was accompanied ??by a summary ??of the monthly purchases and?rebates received?from the third party?suppliers but did not have?any supporting?documentation.

NCSL further???averred??that???while???in?the??process??of??gathering information??from???the??archives,???KRA???proceeded??to??issue Notices of Amended??Assessments??covering??years?2011 to?2015?dated??14th August 2017.?NCS ?said?action??was?done??in bad?faith, was?unprocedural,??unfair?and?contrary?to?the?rule?of law.?This is because the period?in question was wide?and documents had been archived.? KRA ought???to??have??been??understanding?and??granted???NCSL more?time to?retrieve the documents.

NCSL argued?that??the??variances??were??as ?a??result?of??KRA's insistence?on being?supplied?with?physical invoices which could?not?be traced?due to?the passage of time and?movements but the same?had?been?provided to?the?Commissioner's??team?when?filing the Monthly VAT returns.?

NCSL maintained??that?the?above?variances?amounting??to Kshs. 679,458,557.00?arose?due to failure to produce?physical invoices which could?not?be traced?though?there?was?proof?from?the VAT returns?that they??had??indeed??been??filed?in?the??monthly??VAT?returns??for?those respective??years.?Therefore,??NCSL rejected KRA's variances amounting to Kshs. 1,073,507,540.

NCSL also argued that?the?amended assessment and?Objection Decision were?served?out of the?statutory?limit of 5 years from?the date of?self-assessment.?To NCSL,??the?five-year??period??in?case?of income?tax?ended?on?30th June?2017 while ?that?of VAT ended?on?20th June?2017 for all returns?for 2011. Therefore,?the?amended??assessments raised for 2011 on 17th?August 2011 were ?in contravention with?Section 31 (4)(b)(i) of the Tax Procedures?Act.

KRA averred ?that?it commenced??investigations in May 2016 and the audit findings communicated??in the letter dated?11th July 2017 covered the?years 2011 to?2015.?That?the?delay?in concluding?the?investigations was?occasioned??by NSCL's??failure to?co-operate. In any event, KRA submitted that?the law under?Section 29(5)?and?(6) of the Tax Procedures?Act empowers?the Commissioner?to look further?into the accounts?and?business of the?taxpayer??where?the?taxpayer??is?found?to have?wilfully?neglected?to?pay taxes,?or?have?evaded?or?been?involved in tax fraud

KRA submitted?that?NCSL was?fully engaged?on?the issues before?confirmation??of the?assessments.?It?invited?the Tribunal?to look at the?correspondence??exhibited?by both?parties?in the?Statements of Facts. The correspondence?showed that KRA notified?NCSLof?the?findings,?invited??them?to?meetings?to?discuss?issues arising from the investigations?and even allowed?NCSL extension of time to validate their objection.

Further,?KRA averred that?NCSL was given?ample?time to?respond?to the?queries directed?to them.?KRA proceeded to?issue notices?of?amended?assessments?after?NCSL failed?to provide????the?required??information despite?being?called?upon?to?do?so severally.

KRA???argued?that??the??extension??of?the??5-year??statutory limitation?was well?within?their?mandate,drawing?from?the?provisionsof?Section??29(6)??of?theTax?ProcedureAct,?which??empowers???the Commissioner???to exceed the limit under certain?circumstances. Therefore, KRA argued that?the 5-year?limitation?was inapplicable?in this case.

In its decision on 11/4/2021 , TAT observed that:

• ?NCSL was accorded?an opportunity to?present?its case. Further, the?parties engaged in an ADR review?but were?unable?to resolve?the?disputed?issues due to what??appears??to?be?NCSL's??failure?to?provide??the?requested documents??nor could it reasonably?explain why the documents?were not retained?as per Section 23 of the Tax Procedures?Act. NCSL was ?then?invited?to a meeting?to?discuss issues arising from the?audit findings which?invitation?it did not honour. In all, there?is no evidence?to suggest that?NCSL was?never given an opportunity to present?its case.
• Section 59?of?the Tax Procedures Act, 2015?requires?the?Taxpayer?to produce?records?pertaining?to tax investigations?
• NCSL has a duty?to?submit?records to?the Commissioner??under Section 58 of the Tax Procedures Act, 2015.
• The Taxpayer?has a duty?to?keep?its records?for a period?of 5 years?in accordance?with the?provisions?of Section 23 of the Tax Procedures Act
• ??Section?23(1)?of?the?Tax?Procedures?Act, 2015?requires?a?taxpayer??to maintain?documents??required?under?any tax law for a period?of 5?years from the??end??of??the??reporting???date.???The??assessment??in??dispute commenced?????in 2016 and?related?to the years 2011 to?2015.?Clearly,?this was within?the 5-year period?that NCSL was required?to maintain its??documentation.? Without??any??other???plausible???explanation,????NCSL was required?to provide?all the requested?documentation. It is also?worth??noting??that??NCSL??was??unable??to??produce??such documentation required?even?for a single year
• KRA was?specific on the information?????and documents??needed,?being 2011-2015 purchase ledgers in support???of the?monthly??purchases?submitted??and?2013?sales ledgers?in support?of the?monthly?figures reported,??which?NCSL failed to provide. Up to?this?point,?the?Tribunal?found that?KRA was not bound?to consider the alleged evidence??provided??in soft copies.
• ?KRA did not?go past the 5 year?limit since NCSL only filed?its Corporation Tax returns?on 4th?November?2016??for??the??years??2011?to??2015??where???after??KRA issued?its assessments?within?the?set time?limit of?five?(5) years

As such KRA won the case

NCSL appealed to the High Court

On 16/12/2022, the High Court upheld the tribunal’s decision.