On 26th February 2021, the KRA Commissioner Domestic Taxes Risper Simiyu officially launched the Voluntary Tax Disclosure Programme (VTDP) brought into law by the Finance Act 2020. The programme came into effect on 1st January 2021 and will run for a period of 3 years up to 31st December 2023. It is intended to expand the tax base and enhance collection of revenue. In the words of Ukur Yatani, Finance Minister during the reading of the Budget speech in June 2020 the programme is designed ‘to allow Kenyans who, in the last five years may have inadvertently made omissions in their tax returns to voluntarily disclose such omission and pay the tax due’.
The KRA has embarked on a major publicity campaign to encourage many taxpayers to take advantage of the VTDP programme and sent out thousands of letters to taxpayers deemed non-compliant through the KRA Itax system capabilities. These letters have generated anxieties among many in the business community on how to respond. The question begs; will the VTDP have a significant impact, if any, on future tax compliance and revenue collection in Kenya?
There is scant information in the public domain in Kenya of how effective these tax amnesty programmes have been in the past and whether the taxpaying public take up these programmes seriously.
In the recent past the government passed a tax amnesty programme on foreign income, introduced through the Finance Act 2016 that subsequently ran up to 30th June 2019. The Institute of Certified Public Accountants of Kenya (ICPAK) undertook a study designed to establish the uptake and impact on tax revenues of this amnesty. The ICPAK report indicates that there were 3,523 applications processed by KRA amounting to KShs 118.8 billion and concludes that the amnesty was fairly successful in bringing in cash flows equivalent to 3.9% of the financial years 2019/2020 Kenyan annual budget. The report further notes that the cash flows could have been higher had all the principles of a successful amnesty been included such as a clear communication strategy, mechanisms to deter non-compliance and a plan to use the disclosures to improve compliance in the longer-term’.
An OECD report ‘Update on Voluntary Disclosure Programmes-A Pathway to Tax Compliance (2015) opines that a successful voluntary disclosure programme should among other factors be clear about its aims and terms; deliver demonstrable and cost-effective increases in current revenues, be consistent with the generally applicable compliance and enforcement regimes; help to deter non-compliance; improve levels of compliance among the population eligible for the programme and complement the immediate yield from disclosures with measures that improve compliance in the longer-term. It is unclear the extent to which the current VTDP meets any of these principles and against what parameters of success the programme will be assessed.
The OECD report concludes that when drafted carefully, voluntary disclosure programmes benefit everyone involved. However, when applied incorrectly tax these amnesties may lead to apathy and further exacerbate the non-compliance culture especially when offered regularly with no obvious deterrent. For example; taxpayers taking advantage of the current VTDP will be receiving similar treatment to those already compliant taxpayers who paid the correct dues on time. As advantageous as this opportunity may be for those taking up the programme, this may erode the confidence of those who paid their taxes on time.
Some Kenyan taxpayers will choose to remain in the shadows based on their perceptions that their non-compliance will not be detected in future. KRA must therefore clearly demonstrate to the public that the programme is designed and resourced so as to create a substantially increased risk that those eligible for the programme but who choose not to participate will be detected and receive harsher treatment in future. A business as usual approach will not suffice to change the game.
Many businesses are already struggling with the constrained business environment and increased debt load brought on by the COVID pandemic will need a very compelling case to exploit the opportunity afforded to them by the VTDP.
Globally, VTDP programmes have been put in place in several countries to take advantage of the momentum given by, for example, the impending availability of information about financial accounts held abroad and increased cooperation between tax administrations.
It is noteworthy that in August 2020 Kenya deposited with the OECD ratification documents for the Convention on Mutual Administrative Assistance in Tax Matters (“the Convention”) –a multilateral Agreement on exchange of information for tax purposes which allows KRA to exchange information on request with over 141 countries and jurisdictions on all taxes except customs duties. The Convention is the most comprehensive multilateral instrument available for all forms of tax co-operation to tackle tax evasion and avoidance. The Convention will provide KRA with access to tax relevant information on Kenyan residents from foreign countries for years of income 2021 onwards. Under this agreement Kenya is now in a position to sign a multilateral competent authority agreement that will enable it automatically share and receive bank account information with other jurisdictions.
KRA has indicated that it will be relying on its established audit offices to identify compliance risks, formulate and implement compliance improvements while leveraging on KRA’s Data Warehousing platform and the Business Intelligence Solution for case management to improve on its ability to detect and deter future cases of non-compliance. If aggressively implemented, these efforts should go a long way in deterring future non-compliance and offering non-compliant taxpayers no place to hide.
KRA must also adopt a carrot approach to encourage many Kenyans to take advantage of the VTDP programme. Some practical measures which may boost uptake of the VTDP programme in that regard include the following;
Enhance trust, certainty and confidence to the public about the treatment they receive when they choose to engage the KRA on VTDP. The current process for a person who wishes to take advantage of VTDP is to apply online on iTax in a prescribed return for the specific tax head under disclosure, and which applications will be considered within 30 days. This approach designed to mitigate against contact between taxpayers and KRA may be perceived negatively by distrustful taxpayers who may be wary of coming forward in the fear that the process may open up room for intimidation, loss of confidentiality and fear of wider or future audits.
The communication provided by KRA should provide information on where a taxpayer seeking further information about his or her application and opportunities for redress in case grievances in administration of the programme. It may be worthwhile for KRA to introduce the approach taken by some countries to authorise tax agents make initial contact on a no-name basis. This would allow the KRA to confirm its position on the taxpayers’ tax liabilities and this should provide taxpayers with sufficient confidence to come forward and provide full disclosure under the programme.
Effectively communicate to Kenyan taxpayers what measures are being put in place to encourage prompt tax compliance behaviour and detection of current and future non-compliance. This is likely to foster confidence among the already compliant taxpayers about the fairness of the tax system while changing the behaviour of the non-compliant taxpayers. It is said that perceived risk of criminal prosecution is a powerful deterrent to non-compliance though I would argue that it is the fear of publicity of such actions that would be most terrifying. Several governments publish the names of taxpayers who have been criminally prosecuted for tax evasion or have name and shame campaigns for deliberate tax defaulters. Other governments make use of the media to publicize the consequences of non-compliance, without naming individuals.
Undertake extensive taxpayer education and compliance assistance. It is the reality that many taxpayers though willing to comply with their tax obligations are simply ignorant and lack basic knowledge of the tax code. A lot of investment should therefore be geared towards taxpayer education and compliance assistance that is not laced with threats of enforcement and disqualification for the VTDP programme where KRA officers come up with areas of non- compliance.
Businesses should consider undertaking thorough tax health checks through independent advisors to identify and quantify the extent of any possible tax exposures that can benefit from the VTDP programme. This may certainly be the case with transactions involving international tax and transfer pricing where a minor difference in interpretation may lead to millions of shillings in unforeseen liabilities.
In conclusion, voluntary disclosure programmes have the potential to widen the tax base by bringing into the fore hitherto unregistered taxpayers and massive undeclared taxes. However, the key challenge remains in the manner in which the programme itself is administered. It is critical that both the KRA and the public work together towards ensuring a fair, inclusive and equitable tax system where all can contribute meaningfully towards meeting the government budgetary needs.
The writer is the former head of OECD/UNDP Tax Inspectors Without Borders Programme and current Transfer Pricing Lead at Andersen Kenya. james.karanja@ke.andersen.com