Tax Avoidance and Tax Evasion: A Tale of Two Errors

Difference between Avoidance & Evasion

Commonly, tax avoidance is defined as an action taken to minimize the amount of tax owed by a taxpayer hence maximizing after-tax income often through tax planning and utilization of loopholes in tax laws and practices. On the other hand, tax evasion is the illegal, deliberate attempt to obtain a tax benefit by intentionally subverting the rule of law to pay little or no tax.

The distinction between the two is further illustrated by the fact that known instances of tax avoidance often used by taxpayers include tax planning, profit shifting, use of branches in jurisdictions with lower tax rates and utilisation of tax incentives. Instances of tax evasion include smuggling of goods, under declaration or non-declaration of income, tax fraud, dishonest tax reporting, and overstating deductions, as examples. Often used as distinct opposites where the differentiating factor between tax evasion and tax avoidance is that the latter is considered legal while the former is considered illegal and an attempt to subvert the rule of law. This is somewhat an inaccurate understanding of the concept as the distinction is much more nuanced, especially in Kenya.

The Tax Procedures Act defines tax avoidance as “a transaction or a scheme designed to avoid liability to pay tax under any tax law”. The Act further allows the Commissioner to impose a penalty equivalent to double the amount of tax that would have been avoided were a taxpayer found to have engaged in any tax avoidance scheme. This makes engaging in any tax avoidance scheme in Kenya, an offence and therefore illegal. Statistics from the Kenya Revenue Authority (KRA) show that of the 759,164 companies registered in Kenya, only 504,036 of them filed annual returns for the financial year 2021/2022. Of these, only 84,428 firms declared and paid corporate tax. This means that 84% of companies in Kenya are either loss making businesses or inactive. It may speak to the business environment in Kenya but also raises concerns of endemic tax avoidance schemes, especially for those companies that are perennial credit filers.

Efforts to Combat Tax Avoidance and Evasion

The Kenyan government and KRA have utilised a lot of resources to combat tax evasion. Over the years, this has been done through application of cutting-edge technology like introduction of systems such as iTax and the Integrated Customs Management System (iCMS), to facilitate return filing and custom clearance as well as employing cargo scanners and trackers. These innovations have been instrumental in the fight against tax evasion that has seen a reduction of tax evasion incidences and a steady and gradual rise in tax revenue collections. KRA has made tremendous strides in maximising revenue collection and reducing loss through tax evasion. With Kenya being a regional hub for many multinational corporations, it is imperative to come up with mechanisms to clamp down on tax avoidance in order to reap the economic benefits of providing a favourable environment for multinationals to thrive and prosper. Many multinational corporations use their global presence to create intricate tax avoidance schemes to maximise their profits, to the detriment of host nations like Kenya.

It is not just multinationals that may engage in tax avoidance and considering the statistics referred above, it is highly likely that the numerous companies and individuals filing NIL returns and perennial credit filers may be engaging in some form of tax avoidance. Kenya may be losing millions or perhaps billions to tax avoidance but until the same is concretised by data, it remains speculation. Anyone unwilling to pay taxes will innovate crafty mechanisms to avoid paying tax. Therefore, the onus is upon KRA to keep up with the schemes employed by individuals and corporations to reduce their tax liability. Being proactive by keeping abreast with emerging trends in the ever-evolving world of tax is important to help KRA effectively carry out its mandate. 

The end goal of anyone engaging in either tax avoidance or tax evasion is to reduce and/or fail to pay tax. It is the means used to attain either goal that differs. Certainly, the line between the two is thin and almost non-existent. However, the same cannot be said about the efforts and resources employed to deal with tax evasion as have been deployed to deal with tax avoidance. The law imposes hefty fines against taxpayers who engage in tax avoidance. KRA’s audit team must have a deeper and closer look at corporations’ operations and tax planning schemes to thwart these two tax errors that occasions low tax revenues.

By Alan Kasibwa

 

 

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Tax Avoidance and Tax Evasion: A Tale of Two Errors