Receiving a negative objection decision from the KRA is typically the beginning of a stressful journey for most taxpayers in Kenya. There is a mixture of frustration, feelings of injustice, panic, and anxiety about what’s ahead.
It’s overwhelming to consider the potential penalties and unfair tax amounts. While some taxpayers dwell on how unfair and non-transparent tax administration is, confident taxpayers start thinking about litigation: taking up the case with a higher authority, such as the Tax Appeals Tribunal (TAT) and the courts.
What most taxpayers don’t realize is that there is another path to resolve the tax dispute- the alternative dispute resolution (ADR) option. ADR is often faster, more flexible, and less adversarial compared to litigation.
Understanding the benefits of settling KRA disputes through ADR helps you choose your path wisely, saving you time, money, business disruption, and protecting your reputation. This post examines the key advantages of choosing ADR over the TAT process or court litigation. Keep reading to discover why ADR may be the smarter strategic move for taxpayers in Kenya.
What is ADR in KRA Tax Dispute Resolution?
Alternative Dispute Resolution (ADR) is a legal framework created through the Tax Procedures Act to allow negotiations between a taxpayer and KRA when disputes arise. Instead of escalating the matter to the quasi-judicial system, the two parties sit down and discuss to come up with mutually agreed-upon resolutions. ADR is suitable for many types of tax disputes, including:
- Disputes involving the misinterpretation of issues.
- Where there is room for compromise on penalties and interest.
- The matter can be solved through clarification and reviewing documentation.
- The disagreements are factual.
ADR is solution-focused and less adversarial. Let’s get into the advantages of this process below.
Key Benefits of Settling KRA Disputes Through ADR
Here are the various advantages you get for choosing ADR to settle KRA tax disputes in Kenya:
1. Faster Dispute Resolution
According to the ADR Framework, ADR should take no longer than 90 days to resolve a tax dispute. Time is of the essence, especially for business owners and companies looking to resume normal operations as soon as possible. The ADR framework’s top selling point is saving both parties time. This is what a faster dispute resolution means for businesses:
- Faster certainty on what’s next.
- Reduced accumulation of penalties and interest.
- Quick resumption of normal business operations.
- Cash flow stability due to the speedy restoration of business operations.
2. Lower Costs
Applying for ADR in Kenya is free of charge. There are no legal fees required. The only time you incur costs is when you hire a legal or professional representative, such as a tax agent or lawyer. Other miscellaneous costs include travel, printing, and other technical costs incurred when preparing for the negotiations.
On the other hand, litigation costs a considerable amount of money. Even without professional representation, there are mandatory filing fees, such as the KSh 20,000 required to file a case at the TAT.
3. Preserves Your Reputation
TAT and High Court tax proceedings are public. They let third parties access your business or company data that you’d wish to keep private. With ADR, no third parties access your tax affairs, financial information, business transactions, or affiliations.
Only three entities are privy to the tax dispute: KRA, the facilitator, and your professional representation, if any. Also, none of the issues raised at the ADR stage can be used against you in subsequent legal proceedings. This preserves your reputation. If you’re concerned about investor perception, public scrutiny, industry relationships, and exposure, ADR is a suitable path for you.
4. Avoids Binding Precedents
ADR is a negotiation away from the public eye, and it’s less formal. On the other hand, TAT and High Court litigations are public and legally binding. In the latter, the judge’s decision may create a binding precedent. If the ruling is unfavorable, it can affect future tax assessments, influence industry-wide interpretation, and trigger further compliance reviews. ADR avoids all these precedents. This is crucial where tax positions have gray areas or ambiguous interpretations.
5. Provides More Control Over the Outcome
Escalating a tax dispute to the TAT or higher courts is literally handing over control to a third party. You have little to no control over the outcome, especially because in legal settings, these institutions side with KRA until you can evidentiary prove otherwise.
With ADR, the power is still in your hands, because it is a discussion. You are dealing with KRA, and both of you need to reach a mutual agreement. You can negotiate the terms, understand what you are agreeing to, and only sign off when you fully agree with the outcome.
6. Less Formal and More Flexible
Litigation follows strict procedural rules and timelines. It’s rigid, and flouting these rules could have your case dismissed, despite having a solid legal ground. For instance, missing the deadline for the KRA appeal application could make your case fail before it even begins.
While ADR follows a defined legal framework, it’s flexible. The negotiation sessions are less rigid, allowing you to focus on the substance of the tax dispute rather than procedural adherence. This flexibility provides peace of mind, especially to SMEs without in-house legal teams.
7. Less Operational Disruption
As we’ve already established, litigation takes time. In fact, some businesses have seen their cases take years at the TAT and High Court due to case backlog. In some cases, ongoing cases cause the disruption of business operations, for example, where financial accounts have been frozen. Also, preparation of affidavits, attending hearings, compiling evidence, and responding to procedural requests diverts attention away from revenue-generating activities. ADR demands are less, minimizing the operational disruption.
8. Preserves Taxpayer-KRA Relationship
Unless it’s inevitable, you don’t want to be an enemy of KRA as a taxpayer. The relationship with KRA is ongoing, and dragging them at the TAT or Kenyan courts might put a permanent dent in it. Such friction may strain your relationship moving forward, keeping you under their radar. ADR is more collaborative and less adversarial. It’s not about winning or losing against KRA but reaching a reasonable middle ground.
Final Words
ADR is a legitimate and legally recognized framework for resolving KRA tax disputes. For the right dispute, it offers compelling benefits over litigation at the TAT or courts. These benefits include lower costs, faster resolution, more control over the outcome, confidentiality, and less friction with the KRA. If you need help navigating the ADR process in Kenya, contact Gichuri & Partners.
