Introduction

Resolving tax disputes efficiently and fairly is crucial for maintaining revenue collection, promoting tax compliance, and ensuring a harmonious relationship between taxpayers and tax authorities. In Kenya, the legal framework for settling tax disputes has evolved over the years to accommodate various mechanisms, including the use of Alternative Dispute Resolution (ADR). This article explores the legal landscape surrounding tax dispute resolution in Kenya, highlighting key legislations, the role of ADR, its advantages and challenges. Additionally, it provides an in-depth analysis of the legal framework, focusing on the Tax Appeals Tribunal Act, the Tax Procedures Act, and the Alternative Dispute Resolution (ADR) Framework. Furthermore, it delves into the advantages and challenges of employing ADR in tax dispute resolution, offering recommendations to fortify the system.

The Legal Framework for Settling Tax Disputes

Tax Appeals Tribunal Act, 2013

In 2013, Kenya introduced the Tax Appeals Tribunal Act, which consolidated provisions related to tax disputes from existing statutes. This act established the Tax Appeals Tribunal, responsible for hearing appeals against tax decisions made by the Commissioner. Any person wishing to file an appeal with the tribunal must pay a non-refundable fee of twenty thousand Kenyan shillings.

To ensure transparency and accountability, the Tribunal Secretary must submit a copy of each decision to the Kenya Law Reports for publication within seven days. Additionally, the tribunal is required to submit an annual report on its performance to the Cabinet Secretary.

The tribunal operates as a quasi-judicial body, allowing parties to present evidence, call witnesses, and be represented by tax agents. Importantly, the tribunal must make a determination within ninety days from the date of the appeal filing.

Tax Procedures Act, 2015

Enacted in 2015, the Tax Procedures Act aimed to establish uniform procedures for administering tax laws, enhancing tax compliance, and ensuring efficient tax collection. Section 51 of the Act outlines the procedure for taxpayers to object to a tax decision. If dissatisfied with the Commissioner’s decision, a taxpayer can appeal to the Tax Disputes Tribunal. Appeals from the tribunal can further proceed to the High Court and, subsequently, to the Court of Appeal.

ADR Framework

The Kenya Revenue Authority introduced the ADR Framework in June 2015 to guide stakeholders engaging in ADR for tax dispute resolution. It emphasizes a taxpayer-focused approach and sets procedures, timelines, and facilitator roles for ADR discussions. The ADR Framework serves as an internal process for tax dispute settlement outside the judicial realm.

Application of ADR in Tax Disputes

Historically, tax disputes in Kenya were primarily resolved through litigation, resulting in lengthy and costly processes. Litigation not only burdened the courts but also posed challenges to effective revenue administration. To address these limitations, Kenya incorporated provisions in its laws promoting the use of ADR in tax disputes.

The legal basis for ADR in tax disputes is grounded in various legislative provisions, including Article 159 (2c) of the Constitution, Section 55 of the Tax Procedures Act 2015, Section 59C of the Civil Procedure Act, and Section 28 of the Tax Appeals Tribunal Act. These provisions allow parties to apply for the settlement of tax disputes through ADR at any stage during proceedings.

ADR in tax disputes encompasses negotiation, mediation, conciliation, expert determination, arbitration, and other decision-making processes that provide avenues for taxpayers to interact with tax administrators to resolve disputes without resorting to litigation.

Advantages of ADR in Tax Disputes

Utilizing ADR in tax disputes offers several advantages. Firstly, it often reduces the cost of dispute resolution when compared to litigation, making it cost-effective for taxpayers. Secondly, ADR mechanisms preserve the ongoing relationship between taxpayers and tax authorities, emphasizing a win-win approach that promotes cooperation.

Moreover, ADR addresses customer concerns, enhancing tax compliance and improving service delivery. It is voluntary, participatory, and flexible, free from the procedural technicalities associated with litigation. ADR processes are faster, preventing prolonged disputes that could affect tax revenue collection. Additionally, ADR mechanisms maintain confidentiality, avoiding negative publicity for firms involved in disputes.

Challenges of Using ADR in Tax Disputes

While ADR offers significant benefits, it is not without challenges. A common concern is that ADR processes can become lengthy and expensive, contrary to their intended efficiency. Some critics argue that ADR in tax disputes may not be as successful as in other types of disputes due to the unique nature of tax matters involving a public body like the Kenya Revenue Authority (KRA).

The neutrality of facilitators in ADR processes is also questioned, as they are often KRA employees, potentially undermining impartiality. Additionally, many countries, including Kenya, lack the experience and expertise needed to effectively implement ADR in tax disputes.

Recommendations

To enhance the effectiveness of ADR in tax dispute resolution, several recommendations are proposed:

1. Formalize ADR Procedures: Define clear procedures and cases suitable for ADR, ensuring its proper use and minimizing misuse.
2. Strengthen the ADR Framework: Develop a pool of approved mediators, arbitrators and sensitize taxpayers about the availability and benefits of ADR.
3. Implement Cost and Time Controls: Set controls to manage time and costs associated with ADR proceedings, optimizing efficiency.
4. Expand Facilitator Powers: Empower facilitators within defined limits to enhance the efficiency and creativity of dispute resolution.
5. Establish a Specialized Institution: Create an institution to oversee ADR procedures, offering training and support to facilitators.
6. Review ADR Thresholds: Amend the ADR framework to set specific value thresholds, directing disputes below a defined amount to ADR.

Utilizing ADR in tax disputes in Kenya can significantly improve efficiency, reduce costs, and foster better relationships between taxpayers and tax authorities. However, addressing challenges and implementing recommendations is crucial to fully unlock the potential of ADR in the tax dispute resolution process, ensuring a fair and efficient tax system.

By Levi Munyeri- Senior Associate

 Joshua Kimani ACIArb- Legal Assistant