The Finance Act 2016 introduced a provision in the Tax Procedures Act No. 29 of 2015 (the TPA) the purpose of which was to provide an amnesty to tax payers who earn taxable income from foreign source. The Amnesty provisions came into force on 1 January 2017. However, the procedure to be followed by a tax payer seeking to rely on the Amnesty was not fully set out and, in addition, many of the provisions of the new law creating the Amnesty were uncertain. As a result, there was considerable pressure placed on the KRA to clarify the law.
Please click here to read our Legal Alert of August 2016 setting out the salient issues arising from the Amnesty.
On 9 March 2017, the KRA issued the Tax Amnesty Guidelines ostensibly to provide further guidance on how the Amnesty will operate. However, it is our view that this aim has not been achieved; rather, further uncertainty has now been created.
At a Glance
We summarise below key points to note in relation to the Amnesty and the Guidelines:
- The Guidelines do not have the force of law and therefore do not create legally binding rights and obligations. Taxpayers are now in an uncomfortable position of not knowing whether to follow the requirements of section 37B of the TPA and/or the Guidelines;
- The Guidelines by their very nature would be open for variation or amendment by the KRA at any time, without following any statutory procedures. Therefore, the requirements for benefiting under the Amnesty as set out in the Guidelines may be varied at any time;
- The approval requirements in the Guidelines are discretionary and do not sit well with the legal rights created under section 37B of the TPA. The question therefore arises as to the status of a taxpayer who makes full disclosure but is denied the Amnesty by the KRA;
- The definition of “asset” is wide and would extend to immoveable property. The question arises as to the method of repatriation of the real estate assets. If this entails a sale, then a taxpayer may suffer a loss in the case of a forced or rushed sale. Further, if property has been given out as security for a transaction, the ability to effect a sale may be restricted. In addition, if a taxpayer has invested in a fund or hedge which does not allow for early termination, then the ability of that taxpayer to repatriate in time may again be restricted;
- The repatriation obligation in the Guidelines is not provided for under section 37B of the TPA and is therefore questionable;
- Trustees of foreign trusts will face significant legal challenges in connection with the Amnesty. In the case of an irrevocable discretionary trust, a Kenyan taxpayer will not have a fixed interest in the trust and therefore it is unclear on what basis the taxpayer/trustee can repatriate trust assets which are not identifiable in the name of the taxpayer. Further, foreign trusts will be subject to the laws of the jurisdictions in which they are established and a trustee’s legal duties would be guided by the laws of the relevant jurisdiction. The trustee’s legal duties in relation to the beneficiaries may clash with the provisions of the Amnesty and make it difficult if not impossible for trustees to apply for the Amnesty; and
- The Guidelines have incorrectly assumed that Kenya charges tax on a worldwide tax basis as opposed to a Kenya income-sourced basis of taxation. This is a fundamental misconception because it demands repatriation of assets of foreign assets which a Kenyan resident taxpayer may legitimately be holding outside Kenya.
The issues raised above have been discussed in further detail in this alert.
Recap on the provisions of section 37B of the TPA
The Amnesty provisions set out under section 37B of the TPA state as follows:
… the Commissioner will refrain from assessing or recovering taxes, penalties or interest in respect of any year of income ending on or before 31st December 2016, and from following up on the sources of income under the amnesty where-
- that income has been declared for the year 2016 by a person earning taxable income outside Kenya; and
- the returns and accounts for the year 2016 are submitted on or before the 31st December, 2017:
Provided that this section shall not apply in respect of any tax where the person who should have paid the tax-
- has been assessed in respect of the tax or any matter relating to the tax; or
- is under audit or investigation in respect of the undisclosed income or any matter relating to the undisclosed income.
In our view, the Guidelines cannot as a matter of law introduce additional conditions or requirements which are not expressly contained in section 37B. It will be noted from our analysis below that the Guidelines do indeed introduce new conditions and requirements the legal effectiveness of which is questionable.
Legal Status of the Guidelines
The Guidelines state that they have been issued pursuant to the provisions of section 37B. Placing reliance on section 37B is misplaced because section 37B does not allow for the promulgation of regulations or guidelines (whether binding or non-binding). Section 112 of the TPA does allow for the promulgation of regulations under the TPA which would have the force of law. However, the power to issue such regulations can only be exercised by the Cabinet Secretary for the National Treasury and not the KRA. Indeed, the decision of the High Court in Republic versus Cabinet Secretary For Transport & Infrastructure & 5 others Ex parte Kenya Country Bus Owners’ Association & 8 others  eKLR has dealt with this issue and confirmed that any promulgation by a regulatory authority which exceeds the powers of the statutory instrument the regulatory authority seeks to rely on is null and void.
What then is the legal status of the Guidelines? As the requirements of section 112 have not been followed, it is the case that the Guidelines cannot have any legal effect and critically do not create legally enforceable rights on which a tax payer can rely when considering whether to take advantage of the Amnesty.
Our view therefore is that the Guidelines are simply that, namely, non-binding guidelines that can be varied or amended by the KRA, cannot be sued upon and which do not created legally enforceable rights for the benefit of the tax payer.
Key considerations under the Guidelines
- Physical Repatriation of Assets: The Guidelines introduce a new condition relating to physical repatriation of assets. The term “assets” is defined in the Guidelines to include “property” and includes property of all descriptions, including immoveable property, credit balances and other types of property.
What then is the status of property which cannot be physically repatriated like real estate assets? It would appear from the Guidelines that the intention of the KRA is to require the repatriation of all property, which practically means that real estate assets which require to be sold with the sale proceeds be repatriated to Kenya. There is no timeline provided to comply with this requirement, although presumably since it is a requirement under the Guidelines, it ought to be complied with prior to 31 December 2017 when the Amnesty expires. Under section 37B, there is no requirement for repatriation of assets for a taxpayer to qualify for the Amnesty and we would therefore argue that the obligation to repatriate property as set out in the Guidelines cannot have any legal effect.
It is the case that the obligation to repatriate assets is common in many amnesty schemes established in other countries, but the law in such jurisdictions has detailed rules of the repatriation process including timelines for completing the process. It will be appreciated that as Kenya does not have a foreign exchange control regime in force, it may be futile to require repatriation as funds repatriated to Kenya can at any time be freely transferred out of Kenya.
Finally, where assets are held under trust and the foreign trustee would like to apply for the Amnesty, physical repatriation of assets would be challenging due to various practical requirements such as opening a local bank account and the application for a tax registration number (PIN) by the foreign trustee in Kenya. In addition, a foreign trustee who is subject to foreign laws in the jurisdiction in which the trust is established may find that the trustee’s legal duties may restrict his or her ability to repatriate assets to Kenya.
- Disclosure: The Guidelines require full and accurate disclosure of income and assets as another key mandatory requirement for an applicant to qualify for the Amnesty.
This provision could present serious challenges, as it is contemplated that grant of the Amnesty is not automatic and is at the discretion of the KRA. In the event that an application for Amnesty is turned down by the KRA what then is the position and what remedy does a tax payer have? Paragraph 9 of the Guidelines provides that no further information or details will be required, other than the information required under the prescribed form A/37B. Clarity would be required on whether submission of the information and details required under form A/37B would constitute ‘’full and accurate’’ disclosure. Furthermore, if Amnesty is not granted in such circumstances, it is open to question whether the Commissioner can commence a tax investigation based on the information provided.
In addition, it will be noted that section 37B of the TPA does not set out a requirement for the Commissioner to determine whether “full and accurate” disclosure has been made as this would in effect introduce a subjective test as to whether full disclosure has been made. Potential applicants should consider this issue carefully.
- Income subject to the Amnesty: This is a key issue which must be carefully considered. As previously discussed in our Legal Alert of August 2016, income earned outside Kenya is not taxable under Kenya’s laws except where such income relates to business income (partly earned in Kenya and partly outside Kenya) or where it relates to employment income. It appears that section 37B and the Guidelines are drafted on the incorrect premise that Kenya taxes on a worldwide income basis.
It will be noted that by virtue of an exception introduced under paragraph 15 of the Guidelines, any income which is earned in Kenya cannot be subject to the Amnesty.
It is very important to note that under sections 3, 4 and 5 of the Income Tax Act (Chapter 470, Laws of Kenya) (the ITA), business income which is partly earned outside Kenya and employment income earned outside Kenya is deemed to be income which has been accrued or derived from Kenya.
The exception under paragraph 15 therefore has the effect of stating that income under sections 3, 4 and 5 of the ITA would not be capable of receiving the Amnesty. It therefore begs the question as to which income would be subject to the Amnesty, given the fact that foreign income which is not accrued or derived from Kenya is not taxable in Kenya in the first place.
Therefore, the exception under paragraph 15 of the Guidelines is misplaced in our view.
Approval process: The Guidelines provide under paragraph 14 that an application is to be made under the iTax system. A certificate is issued once the Amnesty requirements (including repatriation and full disclosure) are met. The term “certificate” is defined to mean “…a certificate issued upon approval of the amnesty application” (emphasis ours).
It should be noted that section 37B does not envisage an approval process for any application for Amnesty made to the Commissioner. On the contrary, the provision requires the Commissioner to ‘’…..refrain from assessing or recovering taxes’’ once the conditions set out in section 37B have been fulfilled. The requirement under the Guidelines for the Commissioner to exercise discretion in ascertaining whether additional requirements under the Guidelines (which were not set out under section 37B) have been fulfilled does not have any basis in law.
Who qualifies for the Amnesty? The Guidelines clarify that any “person” as defined in the TPA qualifies for the Amnesty. “Person” is defined to include individuals, partnerships and companies among others.
A key issue which should be considered prior to making an application for Amnesty is who should make the application. For example, in the case of a company where a shareholder used untaxed income to invest in a unit trust in England which generates income (taxable in Kenya as it has a Kenyan source), if such an application is made by the shareholder, it appears that the KRA, based on the Guidelines, could still assess the company after the Amnesty is granted to the shareholder. The circumstances in which the foreign income arose should therefore be considered carefully.
Tax amnesties have been successfully implemented in many countries but in each case the law has been detailed and exhaustive granting clear rights and creating clear obligation on both the tax payer and the taxation authority. If the KRA and the Government are committed to seeking wide tax compliance it is recommended that they go back to the drawing board and take into account the experiences of other countries on such matters and consider the legal provisions utilised in such other countries.
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