Treatment of Directors Fees for Corporate Tax and PAYE Purposes

CASE STUDY:AFYA X-RAY ?CENTRE ?LIMITED?VS KRA?????????????????????????????????????????????????????????????

AXCL?was?served?with?a notice?of intention to?audit?on?8th??August 2016. This audit was to cover the period?of 2012 to 2015, with?specific focus on?the?verification?of the?amounts declared in the?income?tax?returns?from employment, business and?rental income.

AXCL was?notified??to?avail?its record??and?books??of?account?for?the period??of income??covered?on?or?before??15th?August 2016.

Consequently,?KRA conducted an?in-depth?audit?and?issued AXCL?with?its preliminary?findings on?5th?September?2016. Based on the information and??records??provided?by?AXCL,??the??investigation established ?that?there?was?under?declaration of?sales in that?there?was?a variance??between?the?income?received?and?that?declared??in the?financial statements.?That?in the?analysis of the?records?it was found?that?the director withdrew amounts from the company for personal?use. Further AXCL failed to deduct?PAYE from the?staff on?its payroll.?In sum, the?investigation found?AXCL?had a total?tax liability of Kshs. 59,010,668.

Vide a ??letter dated??30th December?2016?AXCL filed?an?objection raising concern on?KRA's computation of?corporation tax?and PAYE on?director's drawings.?KRA???acknowledged receipt?of AXCL's ?objection ?and??requested???for??documents?in?support???of?AXCL's???objection , vide??a?letter?dated??17th?January 2017. AXCL was expected to?provide these documents by 27th January 2017.

AXCL wrote back to KRA on 27th January 2017, informing KRA that??it?had?been??unable??to?collect?all?the?documentary evidence?within?the short period?allocated. That AXCL disclosed that it paid the undisputed tax on PAYE. Additionally, AXCL?requested?for a time extension?of 14 days to avail those?documents. ?AXCL was?granted???the??14 days?extension???as?requested???but?did?not utilize??it.?As?result? KRA rendered???its?objection???decision??on?28th February 2017,??confirming???the?total??tax?payable???by?AXCL of?Kshs. 60,545,683.??AXCL?was?informed??of its right?to?Appeal??the?decision

AXCL appealed to the TAT

In this article, we will ?dwell on the ?treatment of directors fees only.

AXCL Argued that:

KRA??had not recognized one?cost?that?they?did?by themselves??which?is?the?Directors??fees.??They assessed PAYE on?it but?they??did not???allow??it as an?expense??for corporate?tax?purposes??in accordance???with the income????Tax?Act.

KRA intended?to?collect?from?both?the?credit?side?of the?bank?statement???by calling?it an?income??for?Corporate??Tax?and??to?also collect??from??the??debit??side?by calling?it?a?Director's???fee.?This amounts to double taxation

KRA responded that On?the?issue?of?PAYE,KRA?established??that??the?Director??of?AXCL?company?withdrew?lump?sums?from?the bank??for??personal???use.??And??it?was established?it was?for?personal??use because?the?director??could?not?prove??how these?cash?withdrawals???were??being?used?to?offset?office?expenses??as alleged. Therefore ?KRA??treated???these??drawings???and??subjected???them??to PAYE as per?section??5?(2) of the?Income?Tax?Act.

In its decision on 17/12/2019, the TAT observed that:

KRA collected from??both??the credit??and??debit??side?of?the bank?statement?with?regards?to?the?PAYE all the?while??not?allowing it as an expense?for?purposes?of?corporate?tax.?If this?is?allowed,?AXCL would suffer?the?effects?of?double??taxation.?The Tribunal was?of the?considered?view that?a taxpayer?should??not?be overburdened??all in the?name?tax?collection. ?Correlatively, the taxing authority?should??not?collect?more?than??is?due?from a taxpayer

KRA was ordered to do tax recomputation ?in consideration of ?the industry practice