News Column

Potential revenue collection trends outlined in Budget

June 12, 2014

Paul Mutegi -1

The Kenya Revenue Authority (KRA) has recently invested heavily in information communication technology to improve tax compliance and boost revenues.

Its ambitious iTax system seeks to migrate returns filing and payment of levies into the digital space.

This system, at full strength, enables KRA to collate and counter-check tax payer data for inconsistencies in transactions and income declared.

READ: KRA maintains new iTax system works despite logjam reports

The authority has also started geo-tagging of rental property and the physical mapping of small businesses to bring non-compliant income earners into the tax bracket.

It plans to deploy remote transmission of Electronic Tax Register (ETR) information in real time to its servers to facilitate reconciliation of a company's VAT on a monthly basis, long before the VAT returns are filed.

Lastly, KRA is also seeking to engage in third party data mining from service providers such as banks, supermarkets and insurance companies to collate and analyse income earned by taxpayers vis-À-vis what these taxpayers declare as their annual income chargeable to tax.

These are aggressive revenue collection strategy that is mainly driven by higher spending demands on the government.

In the 2014/2015 Budget, Treasury secretary Henry Rotich has strengthened KRA's ability to mine for taxpayers data from third parties, especially in instances where fraud or tax evasion is suspected.

Greater KRA collection measures result in the revenue authority issuing assessments on taxpayers it considers non-compliant. This almost always results in the tax controversy being negotiated at a tax tribunal and eventually at the High Court.

Taxpayers' clamour for a specialised tax division at the High Court will only grow stronger and once established, improved tax jurisprudence will benefit the tax payer and the revenue authority as Kenyan tax law is clarified and put in line with international tax best practice.

With the nascent Nairobi Centre for International Arbitration established, tax cases can be referred to it as opposed to the High Court, thus reducing case back log and protecting tax payer information confidentiality.

With a greater interest in frontier and emerging markets by Multi-national Enterprises (MNEs) owing to the diminished growth rates in Europe and America, transfer pricing in Kenya is set to grow in significance.

Transfer pricing legislation ensures that foreign companies deal with their Kenyan related companies at arm's length when advancing loans, stock, the transfer of software and provision of services, so as to ensure that the Kenyan entity does not declare artificial losses to evade paying corporate income tax.

Even when services are offered for free by a foreign company to its Kenyan subsidiary, KRA is empowered to deem the market value of those services so as to compute taxes such as Value Added Tax and Withholding Tax. It can only be expected that the stature of transfer pricing and international tax will grow as these MNEs set up in Kenya.  

Finally, with government working at both the national and county level, greater co-operation between the county governments and KRA is set to be seen at the county level. KRA may make its county offices fully fledged to allow the revenue authority to boost compliance and collections.

KRA's 47 county branches may then have full autonomy to work with their respective governments to ensure that tax revenue is collected from all those it is due. This will ease the budget deficit of Sh342.6 billion currently facing the country.

Mr Mutegi is a tax consultant at EY.

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Source: Business Daily (Kenya)

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