By MUGAMBI NANDI AND SAMUEL KIOKO
As the name suggests, alternative dispute resolution is an
alternative to litigation, which was the
only tax row settlement mechanism in Kenya for a long time.
only tax row settlement mechanism in Kenya for a long time.
Alternative dispute
resolution for tax disputes was rolled out in June 2015 to complement
litigation by providing flexibility and timely settlement of tax
disputes. Since its roll-out, it has seen an increase in expeditious
settlement of rows. For instance, in the 2018/19 fiscal year, 213
disputes with a total value of Sh8.1 billion were resolved through
alternative dispute resolution.
Alternative dispute
resolution draws its legitimacy from the Constitution, Tax Procedures
Act, Tax Appeals Tribunal Act and Kenya Revenue Authority (KRA)
framework. The Constitution provides that in exercising judicial
authority, courts and tribunals shall promote the use of alternative
forms of dispute resolution, including mediation and arbitration.
The
ADR process takes the form of facilitated mediation moderated by a
member of the KRA’s Corporate Tax Dispute Resolution Department. The
department’s team is drawn from tax experts with a wealth of experience
in handling tax matters within KRA.
While the team
appears to be independent in execution of its mandate, the fact that
they are employees of the KRA casts doubt on their actual autonomy and
undermines confidence in their impartiality.
Alternative dispute resolution may be initiated by either the
taxpayer or the KRA. This could be done any time after the appeal has
been filed at the tribunal but before the closure of the case. Once
alternative dispute resolution has commenced, the proceedings at the
tribunal are paused (“stayed” in legal parlance) for 90 days to give
room for negotiations. The parties may continue to negotiate even after
the lapse of the 90 days, provided they record a consent with the leave
of the tribunal before judgement is delivered.
The
alternative dispute resolution mechanism provides various benefits, not
available in litigation, to the parties. First, the alternative dispute
resolution process is expeditious and saves the parties considerable
time.
The negotiations should commence and be concluded
within 90 days. However, the parties may with reasonable grounds apply
to the tribunal for an extension of this period.
Additionally,
once consent has been recorded before the tribunal, there can be no
appeal on the substance of the consent. This means that unlike
litigation where there are three possible levels of appeal, the time
spent on the alternative dispute resolution process is limited to a
single level.
Second, the alternative dispute
resolution process is relatively cheaper than litigation. The legal fees
paid to advocates and tax consultants is lower than the cost of
litigation. Additionally, since there are no appeals where a settlement
is reached, the parties save on the costs, which would have been
incurred in the appeal process.
Moreover, besides
negotiating the taxes payable, taxpayers can also negotiate a payment
plan for the taxes conceded that may not be possible in the litigation
mechanism.
Third, the alternative dispute resolution process is more efficient in handling issues relating to facts and reconciliations.
The
taxpayer is accorded an opportunity to explain the facts and numbers to
KRA’s audit team who have experience in dealing with numbers and
reconciliations.
This is done under the guidance of the moderator, who directs the negotiations from an objective perspective.
In
litigation, tribunal members and judges may not have a good
understanding of accounting concepts and reconciliations, which places
the parties at a disadvantage where these form the core issues.
Fourth,
the taxpayer has control over the process and outcome since the
alternative dispute resolution agreement is only binding when signed by
both parties.
The negotiations are conducted on a
“without prejudice” basis, meaning that any admissions made by either
party cannot be subsequently used against them before the tribunal or
the court, should the alternative dispute resolution process fail.
The
proceedings are private and the specifics not disclosed to the public,
which promotes privacy and ensures the confidentiality of the taxpayer’s
information and affairs.
However, alternative dispute
resolution is not suitable for all cases neither is it always the best
dispute resolution mechanism. For example, it would not be appropriate
where the issues involved relate to interpretation of the law, where a
settlement would be contrary to the provisions of any existing law,
where it is in the public interest to have the issues clarified in the
judicial system and where the non-compliance was deliberate on the part
of the taxpayer.
Alternative dispute resolution has played a key role in reducing the backlog of cases at the tribunal.
There
is a need to strengthen the alternative dispute resolution framework to
accommodate more cases and to enhance and secure the independence of
the Corporate Tax Dispute Resolution Department members who undertake
the mediation process.
There is also a need to
sensitise taxpayers more on the benefits of alternative dispute
resolution, noting to highlight that the process takes into account
business realities, which may not be relevant considerations in the
litigation process.
The writers are advocates at KN Law LLP.
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