Navigating tax audits by the Kenya Revenue Authority in Kenya: A step by step guide for Businesses in Kenya

1. Introduction

Have you received a notice of intention to audit your Company letter from Kenya Revenue Authority (the KRA)? Are you worried on what are the next steps?

In this Newsletter, I explore the Legal framework governing tax audits, triggers of tax audit and strategies for effective management of tax audits in Kenya, offering insights on preparation, execution, and post-audit actions.

By understanding the legal framework and the implications of tax audits, businesses can navigate tax audits with greater confidence and turn potential obstacles associated with KRA audits into opportunities for growth and improvement.

2.??? Legal Framework and the role of the Kenya Revenue Authority in tax audits

Tax audits are an integral part of tax administration process. In Kenya, tax audits are conducted by the Kenya Revenue Authority (KRA) which is a central body established under the Kenya Revenue Authority Act for the assessment and collection of revenue, for the administration and enforcement of the laws relating to revenue and other connected purposes.

Thus, in furtherance of its objectives, the KRA conducts tax audits to ensure that taxpayers are compliant with tax laws and regulations which audits are either conducted at the taxpayer's premises or off site (desktop audits).

Various Tax Statutes in Kenya sets out the provisions allowing the KRA to conduct tax audits. By way of example, the Tax Procedures Act (the TPA) provides for comprehensive tax procedures for tax administration including the conduct of tax audits. Specifically, it outlines the KRA’s powers to inspect records, conduct tax audits and enforce tax compliance. Similar provisions are also found in the East Africa Community Customs and Management Act (the EACCMA) which provides the legal framework for the KRA to carry out post clearance audits in respect to customs issues.

3.??? Why is it important to conduct tax audits?

Tax audits are key for the KRA as they, among others:

·?????? help maintain the integrity of the tax system;

·?????? deter tax evasion; and

·?????? ensure that all businesses contribute their fair share to national revenue.

4.??? What are the triggers for tax audits?

There are many triggers for tax audits, these include but are not limited to;

·?????? Filing nil returns

·?????? Late filing of tax returns

·?????? Amending tax returns

·?????? Discrepancies in tax returns filed

·?????? Whistle blowers

·?????? Data analytics or risk based audits to identify patterns

·?????? Audit requests from other Government Agencies

5.??? TIPs to manage tax audits

5.1. Preparation for tax audits

i)????? Maintain Accurate Records: Tax audits are limited to transactions of a Company for a maximum period of the last five years unless there are incidences of fraud or wilful negligence by a taxpayer.

Section 59 of the TPA as read together with Section 235 of the EACCMA allows the KRA in writing to require a taxpayer to produce for examination such documents that are in the taxpayer’s custody or under their control to enable the KRA obtain full information in respect to the Company’s tax liability. ?In this regard, a tax- payer needs to always ensure that all financial records are up-to-date and accurately reflect their business transactions. These records include LPOs, invoices, delivery notes, receipts, bank statements, payroll records, trial balances, profit & loss accounts, Balance Sheets, business contracts, payroll data etc.

Proper documentation will make it easier to respond to audit requests and defend your tax positions.

ii)??? Reviewing self- assessment returns: Before the KRA audit begins, a Company should ensure that it has reviewed submitted tax returns and documentation to identify any potential discrepancies or areas of concern. This preemptive step allows the Company to address issues before they become problematic during the audit process. One best way to do this is engaging a Tax Consultant to conduct a Tax Health Check/ Self review check.

iii)?? Organize your documents/ documents requested by the KRA: As a diligent taxpayer, the Company should create a systematic filing system for all relevant documents. This will ensure that the audit process proceeds efficiently.

5.2. During the Audit

i)????? Have a designated point of contact to correspond with KRA: The Company should designate a knowledgeable staff member who understands the business operations and tax issues or Tax Consultant to be the primary point of contact with the KRA. This will ensure that all communications are handled accurately efficiently.

ii)??? Seek professional advice and cooperate with the KRA: The Company should ensure that it is cooperative with the KRA in providing the requested information and documentation. However, the Company should ensure that it seeks professional Tax Advice before submitting any information or documentation to the KRA.

iii)?? Document trail of communications: the Company should ensure that it keeps detailed records of all communications with the KRA. The information will be critical in the event that the audits spans out as a tax dispute in later stages.

5.3. Post-Audit Actions

i)????? Review the Audit findings: The Company with assistance of its professional Tax Adviser should carefully review the audit findings to understand the KRA findings.

ii)??? Response to audit findings: Where a Company agrees to the findings or demand for tax by the KRA, they can proceed to settle the tax liabilities. This can be through a lumpsum settlement or instalment payments as may be agreed with the KRA.

However, where the Company disagrees with the audit findings, they have a right of response. The Company should work together with their Tax Advisors/Lawyers to prepare a response to the audit findings which should provide any necessary clarifications. It is also advisable for the Company to engage the KRA for meetings to discuss the response to the audit findings.

iii)?? Areas of improvements/ recommendations: As a last step, the Company should consider taking the insights gained from the audit to improve their internal tax processes and controls. This proactive approach can help prevent future tax liabilities and enhance overall compliance.

Conclusion

As stated above managing a tax audit effectively requires preparation, organization, and a strategic approach. Companies should always ensure that they maintain accurate books of accounts and cooperate with the KRA during the audit process.