Recent reports have alleged that more taxpayers are embracing the Alternative Dispute Resolution (ADR) mechanism, and it’s easy to understand why. ADR is faster, cost-effective, confidential, and less formal. However, being less formal doesn’t mean that this process has no legal timelines and procedures. While it’s not as rigid as arbitration, it remains a facilitated and legal mediation.
We’ve already discussed ADR at length, including its benefits, how it compares to the Tax Appeals Tribunal process, and more. But how does the KRA ADR process unfold in practice? This step-by-step guide explains the KRA ADR process, from the moment a tax dispute arises to the outcome.
Step #1: Tax Dispute Materializes
You can’t jump from disagreeing with a KRA assessment directly into initiating the ADR process. For a tax dispute to be eligible for ADR, it must pass through the three stages: assessment, objection, and objection decision. A tax issue becomes a dispute when:
- KRA issues a tax decision.
- Taxpayer files a Notice of Objection within 30 days.
- KRA Commissioner issues an Objection Decision.
ADR only applies after a formal dispute arises.
Step #2: Submit a Formal ADR Request/Application
ADR is not an automatic process; you must make a formal application. You can do this yourself or have a tax agent submit a written ADR request to the Tax Dispute Resolution Office. Download the application form on KRA’s website, then submit the completed form and supporting documents to the Tax Dispute Resolution Office at Ushuru Pension Towers, Nairobi. You can initiate ADR at the following stages:
- The objection stage, when you are dissatisfied with the Commissioner’s Objection Decision.
- After filing a case at the Tax Appeals Tribunal (TAT).
- When a matter is pending before the High Court of Kenya.
Disclaimer: If the case is already at the TAT or before the High Court, both parties (the taxpayer and KRA) must consent to refer the case to ADR. Also, applying for ADR doesn’t suspend the statutory timelines of the appeals at TAT and the High Court. Seek professional guidance from a tax agent or advocate to avoid procedural missteps.
Step #3: Review and Admission to ADR
Not all tax disputes are eligible for ADR. When you apply for ADR, KRA reviews your case to determine whether it’s suitable for ADR and whether there are legal questions that require judicial determination. The tax authority also does an internal review before consenting to ADR.
If the dispute is approved for ADR, KRA books the matter into the ADR schedule. The 120-day ADR timeline starts running. According to Section 55 of the Tax Procedures Act, the ADR process must be concluded within 120 days. If the dispute isn’t resolved within this period, the process ends, and the matter reverts to litigation.
Step #4: Appointing an ADR Facilitator
Once your case has been admitted to the ADR process, KRA appoints a facilitator. This is the neutral party that manages the process, guides discussions, safeguards structure, and professionalism. You can also appoint a co-facilitator, but at your own cost. A facilitator is not an arbitrator. They neither determine liability nor side with any party. Their role is to manage the negotiations.
Step #5: Preliminary Meeting
This is the beginning of the in-person engagements. In this preliminary conference, the parties frame the main issue and impose the structure of the dispute. Both parties do the following:
- Identify and agree on the issues in the tax dispute.
- Identify and separate the agreed facts from the disputed ones.
- Agree on the timelines for exchanging relevant documents.
- Define the scope of the negotiations.
Issue framing is a sensitive part of the ADR process. Poor issue framing may lead to prolonged negotiations or failure to resolve the dispute. This is where professional guidance comes in handy. A tax agent will help you frame the issue appropriately and raise your chances of a positive outcome.
Step #6: Documents Exchange
For ADR to be successful, both parties must present relevant documents to support their arguments and facts. Here are some of the documents required during the ADR process:
- A formal written position paper.
- Updated tax calculations.
- Supporting schedules.
- Audit papers.
- Reconciliation or expert analysis.
Other issues that are discussed and reviewed at this stage include:
- VAT input eligibility disagreements.
- Transfer pricing adjustments.
- Issues with the classification of withholding taxes.
- The deductibility of expenses/allowable expenses.
- How penalties and interests were calculated.
Here, the facilitator will ensure the exchange is professional and that any discussions are evidence-based.
Step #7: Negotiation
The negotiation sessions are the heart of the ADR process. The sessions can be in breakout discussions or a joint plenary. They can also be in-person or virtual. These meetings are real negotiations and non-prejudiced. The information volunteered during these discussions can’t be used against either party if the matter escalates to litigation. It may take several sessions before the matter is resolved or reverted to litigation.
Step #8: Settlement and Drafting
Once both parties reach a consensus, the settlement must be recorded in writing. This is important for following up on implementation. The settlement document contains the following:
- Background of the tax dispute.
- The resolved issues.
- Updated tax calculations.
- Final tax payable/refundable.
- How the penalties and interests were addressed.
- The payment timelines.
- Other relevant information.
Once signed, the settlement document is legally binding.
Step #9: Implementation
As mentioned above, the settlement document is legally binding. Both parties must implement all agreed-upon terms. Some of the ways to implement this agreement include:
- The taxpayer pays the agreed tax amount, penalties, and interests within the stipulated timelines.
- KRA updates internal systems to reflect the changes.
- KRA halts enforcement actions upon the taxpayer’s compliance.
- If an appeal had been filed, the appellant withdraws it, and the relevant entity formalizes the withdrawal.
If any party fails to comply with the agreed-upon terms, it may trigger escalation and enforcement actions.
Step #10: If ADR Fails
Negotiations may fail, and ADR doesn’t always end in settlement. What happens when ADR fails?If the 120-day window elapses and the two parties haven’t arrived at a consensus, the facilitator terminates the engagement formally. If the matter was already on the TAT or High Court desk, it reverts, and litigation resumes. If the taxpayer had opted for ADR immediately after the objection stage, they could either give in and pay what’s owed to KRA or appeal the case at the TAT.
Wrapping Up
The ADR process is faster, cost-efficient, and less adversarial compared to litigation at the Tax Appeals Tribunal and higher courts. Before you opt for this tax dispute resolution method, it’s important to understand how it unfolds in practice. This step-by-step guide has explained the entire KRA ADR process.
