By Dr. Kariuki Muigua, PhD (Leading Environmental Law Scholar, Policy Advisor, Natural Resources Lawyer and Dispute Resolution Expert from Kenya), Winner of Kenya’s ADR Practitioner of the Year 2021, ADR Publication of the Year 2021 and CIArb (Kenya) Lifetime Achievement Award 2021*
The adverse impact of resolving disputes through litigation including high cost, delays, loss of trust and relationship is what has driven Kenya to incorporate alternative dispute resolution (ADR) as one of the mechanism of resolving tax disputes in the country. There is no question that the application of ADR Framework has enabled KRA to register numerous successes which would not have been possible using the judicial and quasi-judicial processes stipulated under the law. Kenya Revenue Authority (KRA) reported collecting over KShs 21 billion through the Alternative Disputes Resolution (ADR) mechanism by resolving 393 cases vide ADR in the period between July 2020 to March 2021. That was 109% growth in number of cases and 389% growth in revenue when compared to a similar period last financial year 2019/2020.
One of the positive aspects of the KRA ADR Scheme is that many taxpayers have embraced it as evidenced by the increasing number of ADR applications being received by KRA. For instance, in the above period, KRA recorded a 56% growth in the number of ADR applications from 425 received in the financial year 2019/2020 to 661 despite the current Covid-19 pandemic related challenges. As a matter of fact, resolution of disputes through ADR remained unhampered as meetings were conducted virtually. This has further reduced the time within which the meetings are held. ADR of tax disputes is now preferred because it ensures that disputes are resolved in an expeditious and timeous manner with resolution of cases under ADR being achieved in a much shorter time span. Indeed, the speed of tax ADR in Kenya has improved tremendously and average time taken to resolve ADR cases stood at 42 days in the current financial year 2020/2021, more than half the stipulated 90 days.
The ADR of tax disputes in Kenya is also acknowledged in that unlike other dispute resolution mechanisms, it is more pocket friendly as it does not require payment of any filing fees. It is also a mediation process in which a taxpayer can opt to represent himself without the need for an Advocate or a tax representative hence saving costs. The ADR process has also proved effective in preserving the relationship between the taxpayer and the Authority. The mediator ensures that parties are not antagonized and maintain cordial relationships. The process provides a win-win outcome for the parties which leaves both parties happy with the outcome and prevents further escalation of disputes. The ADR mechanism also allows reservation of rights meaning the record of the ADR discussions cannot be used in a court of law without agreement of parties. In addition, given the relaxed procedures, a taxpayer can be allowed to present documents for verification under the ADR process which would otherwise be rejected in a Tribunal or Court hearing in strict adherence to the law governing admission of evidence.
Challenges of Use of Alternative Dispute Resolution in Tax Disputes in Kenya
The KRA Alternative Dispute Resolution (ADR) Framework and the Tax Procedures (Settlement Out of the Tribunal or Court) Regulations as they are currently framed have created challenges that bedevil ADR of Tax Disputes in Kenya. These include lack of independence of the ADR mechanism from KRA, time constraints, lack of clarity on the circumstances to settle or not to settle, need for tribunal or court permission to pursue out of court settlement, conflict of interest challenges because of the use of KRA employees as ADR facilitators and potential conflict between the ADR mechanism for out of court or tribunal settlement as envisaged under the tax laws and regulations and the existing court annexed ADR mechanisms.
The Overreaching Role of KRA in the ADR Mechanism
The role of KRA as envisaged under the KRA ADR Framework and the Settlement Out of Court or Tribunal Regulations is overreaching in that not only does KRA decide whether a matter is fit for ADR resolution but also appoints and pays the ADR Facilitator who is its employee. The decision to appoint the ADR Facilitator is communicated both to the facilitator and the taxpayer by the Commissioner. It would have been better to create an independent Dispute Resolution Unit which is not directly answerable to KRA. However, the Kenyan system is similar to what exists in South Africa where the Facilitators are staff of South Africa Revenue Authority (SARS). Further, thus far no significant complaints have arisen as to adverse effect of use of KRA paid facilitators but in the interest of fairness, in future the role of KRA as investigator, prosecutor and facilitator of ADR may need to be revisited in the interest of enhancing integrity of the ADR process.
Time Constraints of the ADR Process
There is no clarity as to the time allocated for ADR Process under the KRA Alternative Dispute Resolution (ADR) Mechanism as when the process commences depends on when the application for ADR but the time allocated for it is restricted to the time remaining within the 60 days the Commissioner is required to issue the Objection Decision when KRA issues and communicates their decision. This puts pressure on the parties, especially the taxpayer, to choose between ADR and pursuing quasi-judicial process and judicial process and opting for ADR or waiting to opt for out of court settlement after the matter has been lodged with the tribunal or court. In any case, the time to lodge an appeal does not freeze against the party who has lodged an ADR process meaning they have to choose between filling an appeal and pursuing ADR only or pursuing ADR and filling an appeal at the same time. There is need to amend the law clearly stipulate the time for ADR to the scenario of parties wasting resources to first file a needless appeal and then opt for out of court or tribunal settlement just to overcome the limitations imposed by the rules as they currently are.
Lack of clarity on circumstances to settle or not to settle
There are no clear provisions in the regulations and the ADR Framework on the circumstances when to settle or when not to settle tax dispute as stipulated under the relevant tax law and the Alternative Dispute Resolution External Policy of South Africa. The assumption is that any matter that is suitable for ADR is suitable for settlement. In South Africa, it is clear that SARS has power to settle any tax dispute where doing so to the benefit of the State and such settlement may be entered at any time and not necessarily under the ADR process as part of out of court or tribunal settlement. The danger of the current arrangement is that KRA officials involved in a dispute may have to go through motions for lack of clarity on whether to settle or while waiting for bureaucratic decision to come from the top on whether to settle.
Need for Permission of Court for Out of Court Settlement
The ADR mechanism for settlement of tax disputes out of court or tribunal has been complicated further by the requirement that the Court or the Tribunal gives permission for the parties to commence the process. This removes the element of spontaneity of the agreement of parties to engage in ADR after filling of the Appeal as now a formal application has to be made to commence the process. The Court permission is required in addition to the administrative constraints that require that the taxpayer obtains the permission or at least mutual agreement of KRA to opt for out of Court or Tribunal Settlement. It is proposed that the regulations be amended to allow parties upon agreement to merely give notice to the Court or Tribunal for adjournment to pursue settlement without need for formal permission which calls for application.
Aligning the Law on ADR and Out of Court or Tribunal Settlement
There is no clarity in the tax law, in particular section 55 of the Tax Procedures Act and section 28 of the Tax Appeals Tribunal Act render clarity on the ADR procedure before referral to Appeal. There is thus need to reform the law to clearly accommodate ADR and settlement before the tax dispute is referred to the Tribunal or Court. Further, there is no clarity how the ADR process and especially the out of court or tribunal settlement integrates with the existing Court Mandated ADR which has been provided and which runs parallel to proposed ADR for tax disputes. This is necessary to extricate the out of court or tribunal settlement process from KRA control in the interest of the perception of independence and impartiality of the ADR facilitators.
*This article is part of an ongoing series on Specialized Alternative Dispute Resolution in Kenya by Dr. Kariuki Muigua, PhD, Kenya’s ADR Practitioner of the Year 2021 (Nairobi Legal Awards), ADR Publisher of the Year 2021 and ADR Lifetime Achievement Award 2021 (CIArb Kenya). Dr. Kariuki Muigua is a foremost Environmental Law and Natural Resources Lawyer and Scholar, Sustainable Development Advocate and Conflict Management Expert in Kenya. Dr. Kariuki Muigua is a Senior Lecturer of Environmental Law and Dispute resolution at the University of Nairobi School of Law and The Center for Advanced Studies in Environmental Law and Policy (CASELAP). He has published numerous books and articles on Environmental Law, Environmental Justice Conflict Management, Alternative Dispute Resolution and Sustainable Development. Dr. Muigua is also a Chartered Arbitrator, an Accredited Mediator, the Africa Trustee of the Chartered Institute of Arbitrators and the Managing Partner of Kariuki Muigua & Co. Advocates. Dr. Muigua is recognized as one of the leading lawyers and dispute resolution experts by the Chambers Global Guide 2022.
References
KRA Tax Dispute Resolution Division, “Alternative Dispute Resolution (ADR) Framework,” Available at: https://kra.go.ke/images/publications/adr-framework.pdf (Accessed on 25/01/2022).
KRA, “KRA collects KShs 21B from Alternative Disputes Resolution,” Press Release Dated 16th April 2021, Available at: https://www.kra.go.ke/en/media-center/press-release/1168-kra-collects-kshs-21b-from-alternative-disputes-resolution (accessed on 25/01/2022).
KRA, “Why Alternative Dispute Resolution (ADR)?,” Available at: https://kra.go.ke/en/individual/alt-dispute-resolution-adr/learn-about-adr/benefits-of-adr(accessed on 25/01/2022).
The Tax Procedures (Settlement of Tax Disputes Out of Court or Tribunal) Regulations, 2020; Available at: http://kenyalaw.org/kl/fileadmin/pdfdownloads/ LegalNotices/2020/LN123_2020.pdf (accessed on 28/01/2022).
KRA, “KRA collects KShs 21B from Alternative Disputes Resolution,” Press Release Dated 16th April 2021, Available at: https://www.kra.go.ke/en/media-center/press-release/1168-kra-collects-kshs-21b-from-alternative-disputes-resolution (accessed on 25/01/2022).