KRA seeks powers to punish tax avoidance

Politics and policy

KRA commissioner-general John Njiraini. PHOTO | FILE 

By MUGAMBI MUTEGI, pmutegi@ke.nationmedia.com

In Summary

• The Kenya Revenue Authority will have powers to reverse transactions structured with the sole intention of avoiding tax and order the payment of the tax and a penalty.

Taxpayers who use operational and legal loopholes to avoid taxes will pay double the amount avoided as penalty if Parliament passes a proposed law aimed at preventing revenue leakage through expert advice.

The tough provisions are contained in a Bill the Treasury has prepared to seal the legal loopholes that taxpayers have been using to reduce their tax burdens without falling foul of the law.

“If the (KRA) Commissioner has applied a tax avoidance provision in assessing a taxpayer, the taxpayer is liable for a tax avoidance penalty equal to double the amount of the tax that avoided,” says the Bill, which is currently before Parliament.

If MPs pass the Bill, the Kenya Revenue Authority (KRA) will have powers to reverse transactions structured with the sole intention of avoiding tax and order the payment of the tax and a penalty, which at the moment is applied at the rate of 20 per cent of the amount avoided.

Tax avoidance is a practice that companies and individuals legally use to escape taxation and is estimated to cost Kenya billions of shillings in revenue every year.

As opposed to tax evasion, tax avoidance is legal and a popular practice through which companies and individuals (often with the help of auditors) structure their transactions to attract the lowest tax liability.

Companies could, for instance, issue bonus shares to its shareholders and/or directors as opposed to paying out dividends which attract a withholding tax. There are currently no specific laws and penalties directed at the practice.

Treasury officials said the Tax Procedures Bill 2015 is an attempt to harmonise practices contained in the Income Tax Act, Excise Duty Bill and the Value Added Tax Act into one piece of legislation.

If the Bill becomes law, tax planning — as the practice is known among tax experts —will become a risky undertaking, with the taxman handed the powers to interrogate such filings and slap a fine of double the amount due where he determines that they were explicitly intended to lower tax exposure.

“The Bill proposes that when KRA concludes that certain transactions were mainly driven by tax and not commercial purposes, it should order their reversal and demand payment of the said tax plus the penalty,” said Titus Mukora, a partner at PriceWaterhouseCoopers (PwC).

Tax avoidance is difficult to quantify but its illegal variant (tax evasion) is estimated to cost Kenya Sh639 billion annually with multinational corporations the leading culprits.

READ: Kenya losing over Sh600bn in tax evasion annually

Tax Justice Network-Africa (TJNA), a not-for-profit organisation, said in a recent report that Kenya’s corporate sector leads Africa in tax avoidance, estimating that the taxman could collect an additional Sh106 billion annually with close monitoring of their operations.

“In the area of personal income tax evasion, further investigation should be done to uncover the role of the underground economy, as similar magnitudes of revenue loss could eventually be found in this area,” the report says.

The Tax Procedures Bill 2015 is also targeting tax evaders with new measures, including a graduated fine regime for individuals who deliberately under-declare their taxes. Repeat offenders will be hit even harder.