Tax Dispute resolution and legislation
By Janet Lavuna and Crystal Kabajwara
Associate Director- Disputes Resolution Lead, PwC Kenya | Associate Director- Tax Services, PwC Uganda
Introduction
The current global economic environment is placing immense pressure on government revenues. Rampant inflation, increasing food and energy prices and disruption to production and distribution are subduing economic activity and dampening growth prospects. In East Africa, infrastructure spending has significantly increased over the last five years, financed largely by both domestic and external borrowing leading to potentially unmanageable public debt levels. Consequently, tax authorities in East Africa find themselves between a rock and hard place, thereby left with no option but to deepen the tax base through administrative measures and legislative amendments aimed at optimizing and potentially overburdening the existing tax base. This has put tax authorities and taxpayers on a collision course leading to increased tax disputes and controversy.
In this article, we discuss some of the key trends in Tax Controversy and Dispute Resolution (TCDR) within East Africa.
Pay before you are heard
In a victory for taxpayers, the Kenyan Parliament rejected a proposal in the Finance Bill, 2022 that would have required taxpayers to deposit fifty percent (50%) of the disputed tax in a special account at the Central Bank of Kenya before filing an appeal at the High Court from the decision of the Kenyan Tax Appeals Tribunal.The proposal was strongly opposed by taxpayers on the basis that it would hinder the taxpayers’ right to access justice as envisaged in the Constitution of Kenya, 2010.
The Kenyan government must have drawn inspiration from its counterpart in Uganda where a similar provision is contained in its Tax Appeals Tribunal Act. Any person appealing to the Tax Appeals Tribunal against a tax decision made by the Uganda Revenue Authority must first pay thirty percent of the tax in dispute. For a long time, this was the status quo until 2020 when the Court of Appeal sitting as the Constitutional Court in Uganda held that the 30% requirement is not mandatory and should not be enforced in cases where the dispute in question relates to legal interpretation (as opposed to an arithmetic question).
How far can you go?
Until recently, taxpayers in Kenya could not appeal to the Supreme Court as the Court of Appeal was largely considered as the final appellate court for tax matters. However, this changed in May 2022 when the Supreme Court certified the taxpayer’s appeal from the decisions of the Court of Appeal to the Supreme Court, as raising matters of general public importance. The Kenyan Constitution, 2010 limits appeal to the Supreme Court only to matters of general public importance unless the same is on the interpretation and application of the Constitution.The Supreme Court’s Ruling has therefore provided a precedent that allows taxpayers litigating tax issues that widely affect industries or the general public to access the apex court for their final determination. This also comes against the heels of a 2020 amendment to Uganda’s Tax Appeals Tribunal’s Act that allows appeals to the Supreme Court with leave from the Court of Appeal. This should be on matters that raise questions of law of great public importance or if the Supreme Court in its overall duty to see that justice is done, considers that the appeal should be heard. Before then, taxpayers could only appeal as far as the Court of Appeal, which was the final appellate court.
We also note growing litigation on tax matters before the East African Court of Justice (“EACJ”). In a 2020 case, a taxpayer challenged certain amendments to the Kenyan Excise Duty Act (“Impugned Amendment”) before the EACJ as discriminatory relative to other taxpayers in the East African Community (“EAC”) and contrary to the EAC Treaty. The EACJ granted a stay order on the Impugned Amendment pending the hearing and determination of the appeal. Interestingly, Kenya subsequently deleted the Impugned Amendment in compliance with the EACJ Treaty.
Come, let’s talk
Further, we also have an increasing appetite for Alternative Dispute Resolution (“ADR”) to settle disputes expeditiously rather than the conventional appeal process. The trend is more visible in Uganda which passed an amendment in 2020 to the Tax Appeals Tribunal Act that allows a taxpayer who is dissatisfied with a decision of the Commissioner to apply to the Commissioner to resolve the dispute using an ADR procedure. While the regulations to operationalize the provision are yet to be passed, this has not stopped the Uganda Revenue Authority and taxpayers from using ADR to settle disputes amicably, especially for complex cases such as transfer pricing. In Kenya, the ADR process has been welcomed and is largely entrenched within both the Tax Procedure Act,2015 laws of Kenya as well as the ADR Guidelines that prescribe that the same must be undertaken and concluded within 90 days thereof. The only concern that both the draft National Tax Policy as well as tax statutes ought to address is the perceived bias by the facilitators of the ADR, who are Kenya Revenue Authority staff.
Conclusion
It is therefore clear that the scope of tax dispute resolution will expand as the global, regional and local economic landscape continues to grapple with the after effects of the pandemic and global economic shocks arising from geopolitical challenges. Therefore, it is important for taxpayers to adopt a proactive approach to dispute resolution for example by identifying critical tax risks early and dealing with them sooner rather than later. Should a dispute arise, there is a need for flexibility in embracing either ADR or litigation to resolve disputes in order to advance tax jurisprudence.
