Introduction

Domestic taxes (income tax, value added tax, excise duty and stamp duty) contributed over sixty percent (60%) of the total revenue collected by the Kenya Revenue Authority (KRA) in its financial year ended June 2022. KRA has invested significant resources into the investigation of domestic tax offences that negatively impact domes- tic tax collection. This article provides an overview of common tax offences with a view of providing a better understanding of their essential elements and their repercussions, so that one is better placed to avoid them.

Tax Evasion

The Organization for Economic Cooperation and Development (OECD) defines tax evasion as the intentional misrepresentation of tax obligations for instance underreporting of income and/or overreporting of expenses. Despite being one of the most widely known tax offences, tax evasion is not defined in any Kenyan Act of Parliament. However, the Tax Procedures Act, 2015 (the TPA) groups and treats the offence in an identical manner as fraud, wilful neglect, and gross neglect by exempting them from the five (5) years’ limitation imposed on KRA for the amendment of tax assessments.

Whereas the TPA limits the KRA’s auditing and assessment powers to a maximum of five years (5) prior to the assessment/audit date, this limitation does not apply to cases of evasion, fraud, gross neglect or wilful neglect. In essence, there is no time limitation for the investigation and prosecution of tax evasion.

If KRA finds a taxpayer evaded tax, it may amend the taxpayer’s assessment to reflect the tax position the taxpayer would have been in, had it not been for the evasion i.e., the correct amount of tax due. In addition to an assessment of the correct amount of tax due, a per- son found to have evaded tax is subject to a tax shortfall penalty of seventy five percent (75%) of the amount of tax, in addition to late payment interest on the principal tax amount due.

Tax Avoidance

The Income Tax Act (Cap. 470) Laws of Kenya, the Value Added Tax Act, 2013 and the Excise Duty Act, 2015 define tax avoidance as the act of designing a transaction with the primary objective of reducing one’s tax liability. However, tax planning which allows a taxpayer to save on taxes, despite bearing similarities to tax avoidance, is not unlawful.

Generally, tax avoidance cannot be noted from the review of a single transaction in isolation, but from an analysis of the relevance of the transaction in a taxpayer’s business operations. When carrying out such an analysis, one must note that whereas structuring a transaction for the primary purpose of avoiding tax is unlawful, carrying out transactions that are not regarded as efficient is not unlawful (freedom to make uneconomic decisions) as long as the transaction was carried out for the purpose of making taxable income.

Tax avoidance schemes range from acts such as issuance of independent contractor agreements to employees with the primary objective of avoiding deducting employment taxes, to deducting withholding tax at a lower rate and wilfully delaying billing a client so as to split the revenue over different financial years with a view to remaining below the KES 5 Million annual turnover threshold.

Avoidance of income tax attracts:

• Assessment (adjustment) of a taxpayer’s return to reflect the taxpayer’s position had it not employed the scheme
• A penalty equal to double the amount of tax that would have been payable if the scheme had not been employed

Splitting

The Stamp Duty Act (Cap. 480) Laws of Kenya prohibits splitting – which is the act of dividing a transaction into multiple smaller transactions that individually fall below the duty payment threshold with a view to avoiding paying stamp duty on the actual transaction. The fine for this offence is set at KES 50,000 irrespective of the magnitude of the offence. Whereas this penalty seems meagre, it is practical as there are several other factors that discourage splitting including:

a)  Charging Methodology

Stamp duty is charged as a percentage of the transaction value and very few transactions are subject to a minimum threshold below which duty is not payable. As a result, the opportunities for splitting are limited.

b)  Economic Viability

Splitting is in many instances uneconomical. Reasonable perpetrators compare the cost and time spent in splitting to the total tax avoided. If splitting does not result in significant savings, a party will most likely abandon it on account of it being uneconomical.

c)  Effort versus Reward

Transaction splitting is potentially tedious, as it entails the multi- plication of documents drafted and transactions effected. Splitting a high value transaction would thus take up a significant amount of time and resources.

d)  Oversight

Splitting may raise eyebrows. Whereas one may be able to justify splitting a transaction into two, they may not be able to justify splitting it into many smaller transactions. Splitting a transaction would raise the suspicion of financial institutions that facilitate the transactions who may opt to report or suspend the facilitation of such transactions.

d)  Need for Collusion

Splitting may require the consent of the other party to the transaction. If splitting significantly increases the counter-party’s administrative responsibilities, such as signing endless documents, or violates their ethos there is a low likelihood of their participation.

Generally, tax avoidance cannot be noted from the review of a single transaction in isolation, but from an analysis of the relevance of the transaction in a taxpayer’s business operations. When carrying out such an analysis, one must note that whereas structuring a transaction for the primary purpose of avoiding tax is unlawful, carrying out transactions that are not regarded as efficient is not unlawful (freedom to make uneconomic decisions) as long as the transaction was carried out for the purpose of making taxable income.

Rendering a Business Unable to Pay Taxes

This refers to arrangements by senior officers or controlling member(s) of a company that render the company unable to meet an existing or future tax liability. A practical example of this offence is emptying the company’s bank accounts or asset stripping resulting in the company being unable to pay taxes as and when the same fall due and rendering KRA incapable of recovering such taxes using an agency notice or auctioning of the company’s property.

The primary distinctions between this offence and tax evasion relate to the type of taxpayer and the party liable for the offence.

Type of Taxpayer

Whereas tax evasion can be carried out by individuals, companies, non-governmental organisations and other artificial persons, rendering an entity unable to pay taxes can only be carried out in relation to a company.

Party Liable

In instances of tax evasion, the entity found to have evaded tax is liable for such evasion. In limited circumstances, the corporate veil may be lifted to hold the directors personally liable. However, in instances where a company is rendered unable to pay taxes, the company is not liable and thus cannot be punished for this offence; the senior officers and/or controlling members of the company are liable as they are the ones who put the company in such a position.

Senior officers in the foregoing instance include directors, company secretaries, and/or general managers. Controlling members, on the other hand, are shareholders (or persons with a membership interest in the company) who hold at least fifty percent (50%) of the voting rights, rights to dividends or rights to the company’s capital.

Conclusion

Flowing from the above, there is a need for businesses to limit their risk of committing a tax offence which would expose them to penal sanctions and withdrawal of their tax compliance certificates which are vital for various other activities such as tendering of bids. Businesses can limit such risks by putting in place appropriate finance policies and procedures and seeking tax advisory services prior to carrying out transactions. It is also important to note that a person found to have committed any tax offence is entitled to dispute the same in an appropriate manner within thirty (30) days of being informed of the same if KRA carries out the measures in an administrative manner only (assessments, penalties and interest). In the event of criminal prosecution, a taxpayer is also entitled to dispute the same, albeit in Court.