How Alternative Tax Dispute Resolution Helps Businesses

As the name suggests, ADR is an alternative to litigation, which has long been the only mechanism for resolving tax disputes in Kenya.

The out-of-court settlement of tax disputes was put in place in June 2015 to supplement litigation by offering flexibility and rapid resolution of tax disputes. Since its deployment, it has experienced an increase in rapid row settlement. For example, in fiscal year 2018/19, 213 disputes worth a total of 8.1 billion shillings were resolved through out-of-court dispute resolution.

Alternative dispute resolution derives its legitimacy from the Constitution, the Tax Procedures Act, the Tax Appeal Tribunal Act and the framework of the Kenya Revenue Authority (KRA). The Constitution provides that in the exercise of 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 a facilitated mediation facilitated by a member of the KRA’s corporate tax dispute resolution service. The department team is made up of tax experts with extensive experience in handling tax matters within KRA.

If the team seems independent in the execution of its mandate, the fact that they are employees of the KRA casts doubt on their real autonomy and undermines confidence in their impartiality.

Out-of-court dispute resolution can be initiated either by the taxpayer or by the KRA. This could be done any time after the appeal has been filed with the court but before the case is closed. Once ADR has started, court proceedings are suspended (“dangled” in legal parlance) for 90 days to allow room for negotiations. The parties can continue to negotiate even after the expiration of the 90 days, provided that they register a consent with leave of the court before the delivery of the judgment.

The ADR mechanism offers various advantages, not available in litigation, to parties. First, the alternative dispute resolution process is quick and saves the parties considerable time.

Negotiations are expected to start and be concluded within 90 days. However, the parties may, on reasonable grounds, apply to the court for an extension of this period.

In addition, once the consent has been registered in court, there can be no appeal on the merits of the consent. This means that unlike disputes where there are three possible levels of appeal, the time spent in the ADR process is limited to one level.

Second, the alternative dispute resolution process is relatively less expensive than litigation. Legal fees paid to lawyers and tax advisers are lower than the cost of litigation. In addition, since there is no appeal when a settlement is reached, the parties save on the costs that would have been incurred in the appeal process.

Additionally, in addition to negotiating the taxes payable, taxpayers can also negotiate a payment plan for the conceded taxes which may not be possible under the litigation mechanism.

Third, the alternative dispute resolution process is more effective in dealing with issues of facts and reconciliations.

The taxpayer has the opportunity to explain the facts and figures to the KRA audit team who have experience in dealing with figures and reconciliations.

This is done under the direction of the moderator, who leads the negotiations from an objective point of view.

In litigation, tribunal members and judges may not have a good understanding of accounting concepts and reconciliations, putting the parties at a disadvantage when these are the heart of the matter.

Fourth, the taxpayer has control over the process and the outcome since the ADR is only binding when signed by both parties.

Negotiations are conducted on a “without prejudice” basis, which means that confessions made by either party cannot subsequently be used against them in court or in court, if the process fails. out-of-court dispute resolution.

Proceedings are private and details are not disclosed to the public, which promotes privacy and ensures the confidentiality of taxpayer information and affairs.

However, alternative dispute resolution is not suitable for all cases, nor is it always the best dispute resolution mechanism. For example, it would not be appropriate where the issues at stake relate to the interpretation of the law, where a regulation would be contrary to the provisions of any existing law, where it is in the public interest that the issues be clarified. in the court system and when 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 in court.

There is a need to strengthen the ADR framework to accommodate more cases and to improve and ensure the independence of the members of the corporate tax dispute resolution service who undertake the mediation process.

There is also a need to increase taxpayer awareness of the benefits of ADR, emphasizing that the process takes into account business realities, which may not be relevant considerations in the litigation process.

The authors are attorneys for KN Law LLP.