Kenya’s tax dispute resolution system: a dispute system design evaluation

Abstract

Tax dispute resolution is essential to any tax system. A tax dispute can be said to occur when the tax authority and the taxpayer have divergent views on the taxpayer's liability. The divergence in views often emerges from the perceptions that both parties have that the other party has not correctly applied the law. Resolution of tax disputes through adversarial means such as litigation is often considered the worst-case scenario for parties in a tax dispute. Litigation is often costly and time consuming for both the tax authority and the taxpayer. Furthermore, litigation of tax disputes can lead to delays in revenue collection, financial difficulties for businesses and less compliance. The adverse effects of resolving tax disputes through litigation have led tax authorities to turn towards Alternative Dispute Resolution procedures (ADR procedures) that are less adversarial such as negotiated settlement, mediation and facilitated discussion. The use of ADR procedures in resolving tax disputes promises decreased costs, faster resolution, enhanced relationships between the tax authority and the taxpayer and enhanced voluntary compliance. Although there is a desire to use less adversarial means of dispute resolution to resolve a majority of tax disputes, use of out of court settlement procedure under the Tax Procedures Act, 2015 and the Tax Tribunal Act and the internal Alternative Dispute Resolution framework, the use of less adversarial means to resolve tax disputes remains low. Dispute Systems Design (DSD) as proposed by Ury, Brett and Goldberg seeks to design dispute resolution systems that are oriented towards a majority of disputes being resolved through less adversarial means which focus on the interest of the parties. DSD involves the intentional and systematic creation of procedures for handling disputes in a manner that promises lower costs, more satisfying outcomes and enhanced relationships. Ury, Brett and Goldberg propose six principles that can act as criteria for determining whether a dispute system is oriented towards resolving disputes by less adversarial means and the dispute system cuts the cost of disputing and achieves the gains promised by DSD. This study evaluates Kenya's tax dispute system through the six DSD principles proposed by Ury, Brett and Goldberg to identify any shortcomings in the design of Kenya's tax dispute resolution system that may hinder the resolution of a majority of tax disputes through less adversarial means. The methodological approach adopted in this study was a review of the relevant literature on Kenya's tax dispute system, DSD and the six DSD principles proposed by Ury, Brett and Goldberg. The study finds that Kenya's tax dispute resolution system does not meet four of the six principles proposed by Ury Brett and Goldberg and as such is not oriented towards a majority of tax disputes being resolved by less adversarial means such as negotiated settlement, mediation and facilitated discussions.