KCE

COLLEGE

ADVANCED TAXATION NOTES

MINIMUM TAX
Minimum tax is a base of income tax, payable by all persons regardless of whether or not they
make a profit.
The minimum tax rate is 1% of the gross turnover of the company which was affected on 1st Jan
2021
The tax shall be paid in installment and shall be due on the 20th day of each period ending on 4th,
6th, 9th and 12th month of the year of income.

Income exempted from minimum tax.

 Income exempted by the tax Act.

 Employment income
 Income that is subjected to residential rental income tax.
 Income that is subject to turnover tax.
 Income that is subject to capital gain tax.
 Income of extractives sector.

DIGITAL SERVICE TAX.

This is the tax payable on income derived or accrued in Kenya from services offered through a
digital market place. A digital market place is a platform that enables direct interaction between
buyers and sellers of goods and services through electronic means.
The DST is provided at the rate of 1.5% of the gross transaction value (GTV).under the
regulation GTV is defined as:
i) The gross transaction value is the payment received as consideration for the digital
service.
ii) The commission or fees paid for the use of the platform in the case of digital market
place providers

Incomes exempted from digital service tax.

1. Income subject to withholding tax.
2. Online services provided by government institutions.

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 3. Non-resident persons who is in business of transmitting messages via radio, cable, optical
fiber, TV broadcast, internet satellite.
4. Income arising from online services that facilitate payments, lending or trading of
financial instruments, commodities, or foreign exchange carried out by financial
institution specified under the fourth schedule of the Income Tax Act and financial
service providers approve and authorized by the Central Bank of Kenya.
DST is not a final tax for residents and companies with a permanent establishment in Kenya.
DTS will be an advance tax that they will offset against income taxes due at the end of the
financial year. For non-resident and companies without permanent establishment in Kenya , DTS
will be a final tax.
Digital service tax will apply to both resident and non-residents who fall either of the following
categories:
1. Digital marketplace providers
A person who provides a platform that enables the direct interaction between buyers and
sellers of goods and services through electronic means.
2. Digital service provider.
A person who provides digital service through a digital market place.

DTS have been listed under regulations and they include:

 Downloadable digital content

 Streaming of digital content
 Any form of monetizing data bout Kenyans users.
 Subscription based media.
 Data management using electronic means.
 Online sale of tickets
 Search engine related services
 E-learning etc.

TAX INVESTIGATION.
A tax audit is examination, investigation, looking over or evaluating of books and records of
accounts for tax purposes. A tax audit is when the revenue authority decides to examine tax
returns a little more closely and verify that the incomes and deductions are accurate. Tax audit
are conducted because there is information available to the tax authority which triggers tax
audits.

Events which may trigger tax investigation.

 Late tax returns filling by the taxpayer, late tax payment.

 Significant fluctuations in assessable profits.
 Abnormal cost for a business in a given industry.
 High expenses to revenue ration.
 Related party transactions
 Offshore bank accounts.

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  Living a lifestyle beyond the supposed means.
 Regular mistakes on returns.
 Years of unprofitability.
 Omission of incomes.

Objectives of tax investigations.

1. Detection.
This is done through interviews, surveillance, execution of search warrants, analysis of
financial, review of taxpayer’s records and obtaining third party information.
2. Disruption
This is aimed at identifying tax evasion scheme and dismantling the cartel and all the
player involves in such schemes including perpetrators, professionals enablers etc.
3. Deterrence
This is against tax evasion and other fraudulent activities to ensure compliance through
prosecution, imposition of penalties.
4. Enhancing compliance
Stags of tax audit process.
1. Pre-audit stage-
This involves the tax audit planning stage and consists of the following activities:
selecting taxpayers, notifying taxpayers of tax audit exercise and selecting tax audit
teams.
2. Field audit stage/during the tax audit-
This is the period after the tax payer has been contacted by the KRA about the impending
tax audit. During this period actual tax audit takes place.
3. After the tax audit-
This is the period after the tax audit exercise has been concluded and the tax payer issued
with the tax audit report and an assessment where applicable.

Types of tax audit.

1. Compliance tax audit
These types of tax audit are aimed at determining whether taxpayers are complying with
tax laws. The tax officer relies on the information provided or not provided by taxpayers
either in physical or electronic format. In these audits few records and books of account
are examined. These audits are normally conducted where there is information to the tax
authority that the tax payer is not complying with the law. The information can be
internally generated or it can be emanate from out of the tax authority.
2. Normal tax audit
These types’ of tax audits are an examination of records to ensure that the tax payer is
complying with the tax laws. Normal tax audits are routinely conducted in the field and
rely on both physical and electronic records and books of account and any other
document .all types of tax are audited.
3. In-depth tax audit.

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 These types of audit s are deep examination that mostly covers all aspect of tax and
several tax types over several years of income. In-depth tax audits are similar to normal
tax audit but the examination of the records and books of account are deeper. Tax officers
who conducts in-depth audit are more experienced and have a range of other skills
including technology, forensic psychology.
4. Investigation tax audits
Investigation tax audit are targeted audits that examine certain aspect of tax example tax
evasion or tax avoidance.

Powers of the commissioner in relation to tax investigation.

1. Access to the premises and search-
The law allows KRA officers with warrants to enter into and search taxpayers’ premises
including but not limited to residential, offices, private homes, factories, industries and
records.
2. Security for taxes during investigations-
The commissioner does this by requiring the taxpayer to commit payment of tax by
furnishing bank guarantees or any other form of security determined by the
commissioner. Commissioner is also empowered to hold the security such as land or
building owned by the taxpayer who have defaulted in the payment of tax.
3. Arrest and prosecute-
Where there is sufficient evidence of commission of a tax offence, the taxpayer and any
other person involved in the commission of such an offence will be prosecuted in the
court of law not withstanding payment of tax dues.
4. Waiver of penalties and interest-
Where taxpayer has been charged and prosecuted in a court of law, the law provides for
penalties to be waived. In non-fraud cases upon payment of the principal taxes, the
taxpayer is at liberty to make an application for waiver of penalties and interest and the
same will be processed as per the law and established procedures.

Enforcement measures taken during and after investigation

 Arrest and prosecution of offenders
 Recovery of debts
 Issuance of departure prohibition orders
 Issuance of agency notices
 Preservation of funds.
 Assets caveats
 Cancellation of TCC
 Deactivation of PINS
 Continuous surveillance

Taxpayers right under investigation.

1. Officers carrying out the investigation shall identify themselves as being KRA officers by
showing their staff identification cards.
2. To be informed of the purpose and reasons for investigations.
3. To be treated with respect and common courtesy by KRA officer.

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 4. To expect confidentiality with the applicable laws in respect of their personal right to
privacy.
5. To seek clarification on any rule or legislation and it implementation.
6. To object and appeal against a tax decision as provided in law.
7. To expect consistency in the application of law.
8. To be represented and advised by an advocate, tax expert and consultants.
Taxpayer’s obligations in relation to taxation.
1. To register for a tax PIN and in the case of a business whose annual turnover is kes 5
million and above to register for the VAT obligation.
2. Submit returns on time.
3. Make payment of the correct amount of tax on time.
4. Maintain up-to-date and accurate records on all matters that may be relevant to financials
and business.
5. Notifying the commissioner of any mistake promptly.
6. Honor summons to appear before the commissioner.
7. Maintain records as required by tax laws for taxation purposes

TAX AGENTS
Tax agents are individuals or companies that prepare taxes on your behalf. They offer
professional assistance to peoples or companies that cant or don’t want to prepare taxes on their
own.

How do I become a tax agent?

To become tax agent, you need a license. This license is issued once you:

 Pay a prescribed fee.

 Get a recommendation for registration by the tax agents committee.
 You are identified fit and proper person to prepare tax return, notices of objection.
 Be of good character and integrity.
Functions of tax agent.
a) Prepare and submit tax returns on behalf of the tax payer.
b) Liaise with the KRA on behalf of the taxpayer on matters relating to tax.
c) Advise and represent taxpayer in matters relating to tax before the commissioner or
tribunal established under the tax appeal tribunal Act.
d) Deal with any other matter that relate to tax on behalf of the tax payer

Roles /responsibilities of a tax agent.

 Provision of quality tax advice to their clients.

 Submitting returns and payments of taxes on behalf of the client.
 Tax agents must update their clients on changes in the tax laws.

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  Assist clients by providing professional advice to settle their tax arrears within reasonable
time frame.
 Provide assistance to auditors such as required information when their client is being
audited.
 Following up on the tax assessment and refunds for their clients
 Prepare and lodge income tax returns for their clients according to the mandatory due
dates for the tax returns.
 Contribution on the design of a more effective and business friendly tax policies and
procedures.

Deregistration and cancellation of tax agent license.

Voluntary cancellation
If you wish to stop performing your duty as a tax agent, you will be required to inform KRA in
writing at least seven days prior to termination of you services.

Reasons why tax agent license may be cancelled.

1. Tax return prepared and filed by the tax agent is false.
2. You cease to satisfy the conditions for licensing as a tax agent.
3. You stop performing your duties as a tax agent.
4. Notifying KRA that you need to stop performing duties as a tax agent.

TAX HEALTH CHECK.

Tax health check is methodological approach that are adopted in reviewing financial transactions
with an objective of advising on the nature and the extent of the exposure of organization as
regards to tax liabilities.
In this review, we are able to observe areas that organizations can confront in a bid to minimize
on these tax liabilities. At the end of the review, we are able to help the organization come up
with a formidable tax plan that minimizes on tax risks and maximizes on tax opportunities and
help reframe tax objectives and goals.

Purposes/objectives of tax health check.

1. It may be conducted as part of preparations for an upcoming tax audit or investigation
exercise. In this context, the health check will involve reviewing the company’s position
to decide on the strategy for resolving the issues that may be raised by the tax authority
during the audit.
2. The exercise may also be conducted with the view of assessing the robustness of the
company’s tax function and processes.

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 3. A tax health check could also take a form of tax due diligence, where the potential
investor evaluates the tax status of an existing entity it intends to acquire.
4. Tax due diligence reveals potential risks and opportunities, tax contingencies and
aggressive positions that may impact pricing and need to be addressed I the
documentation and implementation of the deal.
5. It provides issues in respect of the business and financial structure from a tax perspective
as well as the legal perspective.
6. Identify any material upsides (potential tax benefits that are not being claimed/envisaged
by the target).
7. Identify any material tax exposure that may be residing with the target.
8. Also helps in uncovering and determining appropriate tax warranties and indemnities.
9. To provide business entity with reasonable level of comfort in affirming that the tax
return will not contain any inappropriate statement and/or estimations before filling of the
tax return.
10. A tax check-up can be a key tool to analyze and highlight area of concerns along with
providing worthwhile suggestions to enable the business to mitigate any potential tax
liability.
11. To reduce the risk of a revenue tax department tax examination.
12. A tax health check could also take the form of a tax due diligence, where the potential
investor evaluates that tax status of an existing entity it intends to acquire. Although
some other considerations typically prevail in determining whether to acquire or not, the
importance of the tax health check in ascertaining the actual worth and/ or the potential
tax liabilities of the existing business cannot be overemphasized.

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 TAX DISPUTES

How tax disputes arise

1. A tax assessment for which the taxpayer is expected to respond/object within 30 days.
2. Taxpayer’s objection: Upon receipt of the Taxpayer’s Objection, the commissioner has
three options namely:
To agree with the taxpayer wholly and vacate the assessment altogether, in which case
there is no dispute,
To partially agree with the taxpayer and amend the assessment accordingly or
To totally disagree with the taxpayer and confirm the assessment.
3. The commissioner subsequently Issues an objection decision within 60 days (in case of
objection arising from income Tax (IT), Value Added Tax (VAT) and Excise Duty (ED)
and 30 days (In case of objection arising from Customs and Border control – Failure to
issue objection decision – The taxpayer’ s objection stands.

Tax dispute resolution process

1. Assessment on taxpayer
2. Objection by taxpayer within 30 days
3. Independent review of the objection by technical officers or panel of Tax experts
within 60days
4. Objection of decision within 30 days
a) Notice of intention to appeal within 30days filing of appeal within 14days/appeal
within 45 days
5. Tax appeals tribunal or
b) Mediation process (facilitator, technical officers, taxpayer)
ADR Concession if yes ADR agreement
If no Tax appeal tribunal.

Right to appeal – Following issuance of an objection decision a taxpayer may appeal to

the Tax Appeals Tribunal within stipulated timelines. If the taxpayer is not satisfied with
the decision at Tax Appeal Tribunal, the tax payer can appeal to the High Court and
thereafter to the Court of Appeal. At any of the stages indicated the taxpayer may seek
leave of the of the Tax Appeals Tribunal/Court to engage in the alternative dispute
resolution ( ADR) process.

The use of Alternative Dispute resolution (ADR) as Tax dispute resolution Mechanism.

Alternative Dispute Resolution (ADR): It’s an alternative method of handling tax disputes
outside the;

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 (a) Judicial process (Court of law)

(b) Quasi-judicial process – Tax Appeal Tribunal

It’s a mechanism that expedites the resolution of tax disputes.

Background: ADR was introduced in June 2015. It was conceived as a means of enhancing
transparency and speed in tax dispute resolution. This was against the background that traditional
means of resolving disputes through litigation brought with them the following challenges:

 Low compliance levels

 Excessing litigation costs and long delays in resolving disputes
 Uncertainty of outcomes for both Taxpayer and KRA.
 Risks related to winner take it all approach and damaged customer relationships.
Objectives of ADR

 Standardization of tax dispute resolution procedures across KRA

 Provision of better governance and transparency in the resolution of tax disputes
 Reduction of the cost of litigation and delays in the resolution of disputes in the court
process.

TYPES OF DISPUTES FOR ADR

I. Income Tax
II. Customs
III. Value Added Tax
IV. Excise duty
ADVANTAGES ADR

I. Addresses delays in conclusion of cases before courts and Tribunals.

II. Less costly both from a time and cost perspective.
III. Improves compliance.
IV. Shift from enforcement to trust and facilitation.
V. Confidential process.
VI. Brings certainty to the outcome for KRA (tax) and taxpayer (tax liabilities in their books)
VII. Has a win – win outcome.
VIII. Meeting facilitated by an independent and neutral.
IX. Principle that is encouraged by the Kenya Constitution.
PARTIES TO AN ADR PROCESS

I. A Taxpayer may be a legal or natural person and includes: a company, association or a

body of persons

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 II. A commissioner – Officer(s) involved in objection/review decision.
III. Facilitator – who chairs the ADR discussions.

Role of Parties:

I. Uphold and maintain decorum, and confidentiality

II. Participate in all discussions fairly and diligently
III. Make full disclosure of material facts relevant to the Tax dispute.
IV. Attend all scheduled meetings
V. Strictly adhere to the agreed timelines
The ADR Process

1. Application for ADR

2. Determination of suitability of tax dispute
3. Communication to taxpayer of the outcome of the suitability test
4. Commencement of ADR meetings
5. ADR settlement agreement is prepared and executed
6. Consent is drawn and filed at Tax Appeal Tribunal.
ADR Timelines

 ADR Timelines in a case pending before the Tribunal/Court

 90 days as provided for in Tax Procedure Act section 55
 Court initiated ADR – dependent on Court timelines given.

Disputes appropriate for ADR

All Tax Disputes can be resolved through ADR with following exceptions:
a) The matter has criminal elements like fraud etc.
b) A party is unwilling to engage in ADR process.
c) Its in the public interest to have judicial clarification of the issue
d) The matter borders on technical interpretation of law
e) The settlement would be contrary to the constitution, the revenue laws or any
other enabling laws
f) There are undisputed judgment and rulings.
Termination of ADR

ADR discussion can be terminated for the following reasons:

1. Where either party opts out of ADR

2. Where parties unanimously agree to do so
3. A party consistently fails to honor ADR meeting invitations.

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 4. Where a party is of the opinion that the dispute cannot be resolved due to undue conduct
on the part of the other party.
5. Where a party fails to carry out reasonable request by the facilitator with no valid
justification

ADR Agreement terms:

1) The background to the dispute and the issues in the contention

2) Agreed and non – agreed issues
3) The process and specific exercises undertaken during the ADR process.
4) Recoverable and non- recoverable taxes and justification thereto
5) Terms of settlement
6) Undertakings given by each party if any
7) Payment plans where applicable
8) ADR agreement must be put into writing
9) It should be signed by both parties/their representatives
10) Should be witnessed by the facilitator
11) Each party is to retain a copy of the signed agreement
12) Signed agreement shall be binding to both parties

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 One Stop Border Post (OSBP)
Definitions
The OSBP refers to the legal and institutional framework, facility and associated procedures that
enable goods, people and vehicles to stop in a single facility in which they undergo necessary
controls following applicable regional and national laws to exit one State and enter the adjoining
State.
An OSBP is the application of joint controls to minimize routine activities and duplications
across borders.
OSBP is a border management model that promotes a coordinated and integrated approach to;

 Facilitate trade, the movement of people, and improving security.

 The border crossing dwell times for travelers and transporters i.e shortens the
clearance time at the border crossing points.
 Reduce logistic costs.

Characteristics of OSBP
The OSBP concept consists of four pillars:

1. Legal and Institutional Framework:

It is generally agreed that the application of national laws is limited to the territory of
a state. OSBPs rely on the principle of extraterritorial application of laws, which
allows a state to extend the application of specific national laws outside its own
territory.
2. Simplification and Harmonization of Procedures:
Implementing an OSBP requires simplifying and harmonizing border crossing
procedures rendering an OSBP effective.
3. ICT and Data Exchange
ICT is a critical component of collaborative single window systems, simplification of
documentation, border management, and modernization of customs, immigration, and
related services.
4. Hardware Infrastructure
This includes OSBP facilities such as offices for border officials, operational
equipment, warehouses, and parking.

Rationale for OSBPs

The major reason for establishing OSBPs along transport corridors is to expedite the movement
of goods and people, and to reduce transport costs across national boundaries;
At an OSBP, passengers, cargo and vehicles stop once to undertake border crossing formalities
to exit one Partner State and enter the other;
All border formalities and the processing of documentation for goods and passengers are carried
out in a single clearance hall for exiting one Partner State and entering the adjoining State;
If cargo inspection is required, to the extent possible, it is done at once through a joint inspection
involving all the necessary agencies from both Partner States at the same time.

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OSBP Principles
In order to achieve its goal, the following principles govern the functioning of an OSBP:

 Only one stop by users for both exit and entry clearance controls;
 Establishment of a control zone combining exit and entry controls;
 Direct movement of border crossing traffic to the control zone of the country of entry;
 Proper traffic management according to categories of users;
 Use of appropriate signage to guide the users at OSBPs;
 Completion of exit procedures before entry procedures;
 Reliance of the adjoining Partner State upon the host Partner State for security and
management of the portion of the control on the exit side of the OSBP;
 Designation by each Partner State of a lead agency to coordinate OSBP management;
 Extraterritorial application of national laws in the control zone in the adjoining host
Partner State;
 Allocation by the Host Partner State to the adjoining Partner State of adequate and
comparable facilities on the basis of indicated needs; and
 Application of risk management by border agencies to facilitate operations at OSBPs.

TYPES OF OSBPs
There are three types or models of OSBPs:
• Juxtaposed Model
• Straddled Model
• Wholly located model (Single Country)
Juxtaposed Model
under the juxtaposed model, State A and State B share facilities in the country of entry. This
implies that passengers and cargo stop only once in the country of entry for both exit and entry
formalities. Exit formalities must be done before undertaking entry formalities, e.g Taveta/Holili
and Malaba/Malaba.
All OSBP offices in Tanzania are of Juxtaposed Model
Straddled Model
This is where a single facility is built across the border line for the two adjoining states to share
Similarly, passengers and cargo stop once but start with exit formalities before undertaking entry
formalities. e.g Nemba/Gasenyi
Wholly located model (Single Country)
Is the (common) single country model, i.e, an OSBP wholly located in one of the two adjoining
states, a single shared border facility is constructed in one of the countries to house officers from
both countries to carry out border controls e.g Ruhwa
Current Working OSBPs:
• Holili/Taveta
• Namanga/Namanga
• Rusumo
• Mutukula
• Tunduma/Nakonde

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Benefits of OSBPs

To the National governments

 Improved collection of trade taxes associated with efficiency gains

 Efficient borders that facilitate international trade, investment, and economic growth
 Promotion of economic competitiveness
 Improved border security
 Better utilization of government resources by border agencies
 Promotion of better international relations between countries

To the Border Control Agencies

 Better resource utilization through improved cross-border cooperation and sharing of

intelligence, operational data, and resources using Coordinated Border Management
(CBM) and Integrated Border Management (IBM) concepts
 Improved employee motivation, which translates to increased productivity through
the use of simplified and harmonized procedures as well as from working with better
facilities. e.g., buildings, equipment, furniture
 Better environment for increased use of ICT and faster processing due to simplified
and harmonized procedures
 Improved traffic flow and improved border infrastructure, especially where
modifications are to be undertaken
 Increased transparency, which enhances security and helps reduce corruption.

To the Road Transport Operators, Shippers, and Customs Agents

 Reduction in delays at borders and in operating costs

 Greater asset utilization in respect of truck turnaround times
 Predictability of border and transit procedures
 Faster processing of documents and travelers

To Manufacturers and Traders

 Savings in the cost of inputs

 Increased reliability of shipments enabling reduced inventories
 Reduced capital tied up in logistics through just-in-time delivery
Consumers
 Reduced cost of consumer products
 Increased availability of goods

Travelers and Tourists

 Reduced time spent at borders

 Predictable, simplified and harmonized procedures

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