Tax administration procedures may be defined as the processes that should be observed by the tax payers and the tax authorities when transacting with each other. The procedures may be formal processes that have been legislated or informal processes that are borne out of the practices of the tax authorities. They include the procedures for tax payer registration and de-registration, tax audits, refund processing, return filing and amendment, assessments as well as objection and appeals.
As many businesses interface with the tax authorities during their lifetime, the tax administration procedures are a core aspect of the perceived efficiency of a tax system and ultimately the business regulatory environment of the specific economy. They impact the growth of the businesses as well as financing and employment opportunities. Equally, inefficiency and excessive bureaucracy of the tax administration system may potentially foster informality and other forms of non-compliance with the laws and regulations.
In its “Doing Business” series, which is an annual report that investigates the business regulations in the target countries that enhance business activity and those that constrain it, the World Bank considers several indicators including the paying taxes indicator that measures among others, the time that a firm takes in order to conclude post tax filing processes such as tax refunds, tax audits and tax appeals. Uganda and Kenya are ranked 122nd and 80th respectively, in the World Bank’s 2018 Doing Business Report.
In order to encourage voluntary compliance and to improve the overall efficiency of the tax system, it is important that tax administration procedures should balance the tax payer’s rights and obligations by incorporating specific tax payer service benchmarks and performance standards for the tax authorities. In its landmark report on Taxpayers’ Rights and Obligations (1990), the OECD notes that taxpayers have a right to a high degree of certainty as to the tax consequences of their actions and that they should be able to anticipate the consequences of their ordinary personal and business affairs. In Tax Law Design and Drafting (volume 1; International Monetary Fund: 1996), the IMF notes that some of the broad principles that should apply in each tax administrative rule are fairness and efficiency.
Both Uganda and Kenya achieved major tax policy milestones in 2016 by introducing the Tax Procedures Code Act, 2014 (‘TPCA’) and the Tax Procedures Act, 2015 (‘TPA’), respectively. The policy changes by both countries were among other reasons aimed at harmonizing and consolidating the tax procedures under the existing tax laws.
While both Uganda’s TPCA and Kenya’s TPA institute specific timeframes for tax payer compliance which are reinforced by various sanctions and penalties, the policy approaches of Uganda and Kenya differ with respect to the mandate of the tax administrators to execute their obligations within a statutory time frame.
Below is a comparison of some the tax administration approaches of Uganda and Kenya as enshrined in the TPCA and the TPA, respectively that would potentially impact the efficiency of the business regulatory environment in each country. The comparison specifically covers the key areas of private rulings, tax controversy and dispute resolution, document retention and tax de-registration.
The timeframe of issuing private rulings
Private rulings are written decisions by the tax authorities in response to a taxpayer’s request for guidance relating to a transaction entered into, or proposed to be entered into, by the taxpayer. Under both the TPA and the TPCA, private rulings are binding on the tax authorities if all material disclosures are made by the tax payer in the request for the ruling and the transaction has proceeded in all material respects as described in the application.
As both Uganda and Kenya are developing countries, some of the transactions that may be proposed by prospective investors may be outside the realm of the tax advisor’s experience or the tax legislation may not make an obvious reference to them. Therefore, one of the points of interaction with the tax authorities for some potential foreign investors into Uganda or Kenya, is through requests for private rulings that are submitted through their tax advisors to the tax authorities.
The ruling may be required by stakeholders in various countries (particularly where the potential investor has global operations). It may relate to key decisions such as financing of a local business, mergers and acquisitions or confirmation of eligibility to tax relief. It is therefore crucial that tax administration procedures ensure that the response time to requests for private rulings by the tax authorities is reasonable.
While Uganda’s TPCA does not impose a legislative timeframe within which a request for a private ruling should be responded to by the tax authorities, under Section 65 (3), Kenya’s TPA mandates the tax authorities to issue a private ruling to an applicant within forty five days of receiving an application for a private ruling, if it conforms to the requirements of Section 66 of the legislation which permits Kenya’s Commissioner – General to refuse an application for a private ruling in specified circumstances .
Tax controversy and dispute resolution procedures
Tax controversies may ensue when a tax payer disputes a decision of the tax authorities. The controversy may arise due to an audit or assessment of the tax payer by the tax authorities.
Due to the considerable pressure placed on the tax authorities of most developing countries to meet the fiscal demands of the government, refunds of tax paid are particularly contentious. As the tax authorities are cautious to avoid any loss of revenue, a refund claim will in most cases trigger a verification audit of the tax payer. However, as explained below, regular refunds are critical for the continuity of business operations. It is therefore important that the rights of the tax authorities to collect revenue are balanced against the rights of the tax payers to continue their business operations for the good of the economy as a whole.
For instance, in order to have regular cash flows, it is important for loss making businesses to receive refunds of excess withholding tax expeditiously. Limited cash flows may impact the ability of a business to pay its employees, suppliers, creditors as well as its ongoing tax liabilities thus negatively affecting the economy. Further, in order to ensure continuity of business operations, it is critical that Value Added Tax (VAT) registered businesses that are undertaking significant construction projects or those which primarily deal in exported supplies receive refunds of excess VAT within a reasonable time frame.
Typically, businesses that are under audit incur significant time and costs often involving an external tax advisor in order to respond to the inquiries of the tax authorities. Further, if the audit is an investigative audit i.e. where tax evasion has been alleged, the seizure of documents may considerably disrupt business operations. Furthermore, penalties for non-compliance with the tax laws (such as penal interest) may escalate significantly during the audit period if a speedy resolution is not sought. For instance, Uganda imposes penal interest at the rate of 2% per month (compounded), for a tax payer’s failure to pay VAT within the statutory timeframe.
Due to the serious repercussions of the tax audit, it is important for the legislators to balance the rights of the tax authorities to collect the appropriate taxes with the rights of the tax payers to a speedy resolution of the issues arising from the audit.
As tax payers who have been audited may in many instances disagree with the findings of the tax authorities, it is likely that they will object to the findings of the tax audit. Therefore, legislators may control the time frame of the audit resolution by prescribing a statutory time frame within which a final decision (called an objection decision) is issued by the tax authorities.
Below is a comparison of the critical provisions that would affect the time frame of issuing of a final decision by the tax authorities in Kenya and Uganda as contained in the TPA and TPCA, respectively.
Time frame of objecting to a tax decision
Kenya’s legislators seem to recognise the wider economic effects that may result from disruption to business operations and lack of certainty in tax controversy proceedings by imposing short and strict timelines within which an objection is lodged by the tax payer and when an objection decision should be made by the tax authorities.
Kenya’s TPA prescribes a shorter period of 30 days within which an objection to a tax decision should be lodged by a tax payer when compared to Uganda’s 45 days.
Timelines of issuing an objection decision
Where the tax authority has not made an objection decision within 60 days from the date that the taxpayer lodged a notice of the objection, Kenya’s TPA deems the tax payer’s objection to have been unequivocally allowed. Conversely, under Uganda’s TPCA, in addition to prescribing a longer statutory time frame to the tax authority to make an objection decision (i.e. 90 days), Uganda’s TPCA may waive an election by a tax payer to consider the objection as having been allowed (following the lapse of the statutory 90 days), if a review of the tax payer’s records is necessary for settlement of the objection and the tax payer is notified. This exception under the TPCA creates further uncertainty in terms of the timelines of concluding the tax controversy.
However, both legislations fail to prescribe a maximum time limit for the audit period itself i.e. the period prior to the issuance of the tax decision leading to the objection by the tax payer thus failing to provide any certainty to the tax payers or prospective investors in both countries.
Period of document retention for the purposes of tax investigation
Documents and other records are important for running a business and also for making critical decisions affecting the business. It is therefore important for the legislators to institute a reasonable maximum timeframe during which the documents seized for the purposes of a tax investigation should be returned to the tax payer.
Both Uganda’s TPCA and Kenya’s TPA permit the tax authorities to seize documents and storage devices for the purposes of tax administration. However, only Kenya’s TPA requires that documents or data storage devices should not be retained by the tax authorities for a period longer than six months unless the document or data storage device is required for the purposes of any proceedings under the TPA or any other written law (Section 60 (9) of the TPA).
For many prospective investors, the efficiency of exit procedures in the target country are key considerations prior to investment. Tax de-registration procedures are therefore a fundamental part of a country’s business processes.
While both Kenya’s TPA and Uganda’s TPCA permit tax de-registration, only Kenya prescribes a minimum response time for the tax authorities, following an application for tax de-registration. Kenya’s TPA deems an applicant to have been deregistered if the tax authorities fail to respond to their application for deregistration within six months (Section 10 (7) of the TPA).
While it is important for tax administration procedures (particularly in developing countries) to ensure that revenue is not lost due to decision making timelines which are unreasonably restrictive, it is also critical that the interests of the businesses that sustain the economy should be given due consideration. Tax administration procedures should ensure that the wider economic effects of any perceived uncertainty with respect to critical business processes are weighed against the short term gains of meeting the fiscal budget requirements.
Ms. Rita Lugoloobi Zabali is a Tax Advisor working with Ernst & Young. She is enrolled as an Advocate of the High Court of Uganda. She holds a Bachelor’s degree in Law of Makerere University, Kampala, a Diploma in Legal Practice of the Law Development Center, Kampala, a Diploma in Tax Revenue and Administration of the East African School of Taxation as well as an LLM Tax of Queen Mary, University of London.