NAVIGATING ALTERNATIVE DISPUTE RESOLUTION MECHANISMS FOR TAX DISPUTES IN KENYA

I. Introduction

Tax disputes in Kenya arise when taxpayers challenge decisions made by the Kenya Revenue Authority (KRA), typically following assessments under the Tax Procedures Act, 2015. Alternative Dispute Resolution (ADR) in this context, is a voluntary, participatory and facilitated discussion over a tax dispute between a taxpayer and the KRA as defined by the ADR Framework. It offers a voluntary and collaborative method of resolving such disputes without the rigidity, delays, and costs of litigation.

II. Legal Framework

1. The Constitution of Kenya, 2010
Article 159(2)(c) mandates promotion of ADR methods such as reconciliation, mediation, arbitration and traditional dispute resolution mechanisms.

2. The Tax Procedures Act, 2015
Section 55 allows for out-of-court settlements within a 120-day limit, upon approval by the Court or the Tax Appeals Tribunal.The dispute is referred back to court or tribunal if not resolved within the set timelines.

3. The Tax Appeals Tribunal Act, 2013
Section 28 enables parties to settle their tax disputes outside the tribunal, and report back the outcome of their settlement.

4. The Tax Procedures (Settlement of Tax Disputes Out of Court or Tribunal) Regulations
These Regulations provide the process of settling tax disputes out of court. They categorically emphasize the voluntary nature of ADR and how it can be initiated by either the taxpayer themselves or the KRA.

5. The KRA ADR Framework
In 2015, the KRA developed the ADR Framework for the purpose of guiding stakeholders wishing to engage in Alternative Dispute Resolution to resolve their tax disputes. It promotes dispute resolution outside litigation, encouraging a taxpayer-focused and flexible process.

III. Mediation in Tax Disputes

Mediation involves a neutral third party nominated to facilitate the settlement. Where the court or tribunal has permitted the parties to a tax dispute to settle the dispute out of court or tribunal, a facilitator is nominated, with the consent of the other party to the dispute. The nominated facilitator/mediator is usually one that has not been involved in the tax dispute in any way. This is to avoid conflict of interest or any form of bias.

The facilitator must convene the first meeting between the parties to a tax dispute within 14 days of their nomination. During this meeting, the parties will identify issues for settlement, agree on meeting schedules, exchange relevant documents, determine meeting conduct, and address other necessary matters.

Once meetings begin, parties cannot communicate with the facilitator privately, and discussions must relate strictly to the tax dispute at hand. Meetings must maintain confidentiality, fairness, integrity, full disclosure of relevant information, and adherence to timelines. If a party cannot meet a deadline, they must notify the facilitator and the other party in writing.

Failure to attend a meeting without a valid reason may lead to rescheduling or termination of the process. At the conclusion of the discussions, parties may enter into a settlement agreement based on the evidence presented during the meetings. The settlement agreement will be an indication that the disputants have been successful in settling their dispute out of Court or Tribunal. It must be dated and signed by both parties and witnessed by the facilitator. Most importantly it becomes binding to both parties.

After settling their dispute, the disputants file a consent agreement in Court or Tribunal clearly setting down the terms of the settlement agreement. This is then recorded and adopted as an order of the Court or Tribunal. If a party involved in a tax dispute breaches the terms of a settlement agreement, the other party may seek enforcement by filing an application with the Court or Tribunal.

IV. Case Study

Rongai Tiles & Sanitary Wares Limited v Commissioner of Domestic Taxes [2021] KEHC 325 (KLR)

The court underscored the value of ADR in tax disputes, emphasizing the court’s affirmative obligation to promote ADR and give effect to ADR processes in accordance with the law.

Commissioner of Investigations and Enforcement v Estama Investments Limited [2020] KEHC 10245 (KLR)

The High Court upheld a tax settlement reached through ADR and emphasized its finality, reiterating that once parties enter into such an agreement, they are bound by its terms.

V. Advantages of ADR

• Speed: Faster resolution of disputes compared to years of litigation.
• Cost-effective: Reduced legal and administrative costs.
• Relationship building: Preserves working relationships between the taxpayer and the KRA.
• Confidentiality: Protects sensitive financial and corporate data.

VI. Challenges

• Limited awareness: Many taxpayers are unaware of ADR as an alternative to litigation.
• Power imbalance: Mediators are often KRA staff, raising neutrality concerns.
• Court approval requirement: Adds a procedural step that delays the process.
• Narrow scope: The KRA ADR Framework recognizes only facilitated mediation, excluding other ADR options like arbitration.

VI. Recommendations

• Enhance public awareness: Through civic education and tax literacy campaigns.
• Training and capacity building: Mediators and tax practitioners should be educated on the current trends in mediation and updated in case of any amendments to the existing legislation.
• Broaden legal framework: To incorporate more ADR methods and enhance enforceability.

VII. Conclusion

Alternative Dispute Resolution serves as a powerful tool for resolving tax disputes in Kenya, offering an efficient, cost-effective, and amicable alternative to litigation. However, to maximize its effectiveness, both taxpayers and KRA must embrace it fully and work towards improving the legal framework and its implementation.

by Karuga Maina