21 June 2012

Kenya: Executives Set to Pay for Tax Evasion

DIRECTORS and senior management will now be personally liable for tax offences committed by the firms they work for and will be compelled to pay any dues to Kenya Revenue Authority if such offences are proven.

This follows an amendment to section 209 of the Customs and Excise Act contained in the Finance Bill 2012.

The amendment introduces a new subsection (5) which states that if tax offences by a company are found to be committed with the consent or connivance of, or is attributable to any neglect on the part of a director, manager, secretary or similar officer of the company; then the court can order such a person to make part or whole payment of tax assessed by the KRA Commissioner as unpaid.

It may be paid in addition to or as substitution to a penalty. KRA Commisioner General John Njiraini singled out real estate development companies as some of the notorious ones when it comes to such tax evasion methods abetted by directors and managers. "We have noted a tendency among some developers to use multiple corporate vehicles with the intention of defeating requirements for the taxation of the gains they make," Njiraini said yesterday.

Njiraini explained that in such schemes a separate company is used to develop each property after which the company is wound up and another one set up to handle subsequent developments.

The commissioner put on notice such company heads explaining that the Finance Bill 2012 has strengthened the legal provisions and us such it would be hard for them to evade payment of taxes. "We intend to use this new ammunition to discourage tax evasion by pursuing directors in their personal capacity," he warned.

According to an analysis by consultancy firm Deloitte and Touche, as much as this move will deter officials from engagement in illegal activities, it has a loop hole for abuse by the authority. Deloitte notes that it may be used to harass company officials as an easy way of collecting revenue from individuals. "If you are a director and doing something naughty, be warned that KRA will come for you," Nikhil Hira a senior analyst at Deloitte told entrepreneurs on Tuesday at a post budget informative workshop organized by the NIC bank.

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