Can KRA Reopen a closed tax audit issue?

Can KRA Reopen a closed tax audit issue?


In the year 2016, ML created a special purpose vehicle to construct five (5) town houses. In this regard, ML entered into a joint agreement with Green Papyrus Company. The project was executed ‘and both companies jointly disposed of one (1) unit and shared the proceeds equally.

ML was unable to sell the remaining two (2) units on its own, even after contracting real estate agents to help sell the units. Faced with financial constraints, ML entered into another agreement where they agreed to dispose of the remaining two units to Green Papyrus Limited for a consideration of Kshs. 105,000,000.00 equivalent to their shareholding in A to Z Green Papyrus Company; qualifying the transaction as a capital gain and Capital Gains Tax of Kshs. 581,637.00 was duly paid in 2017. The cost for the two units was Kshs. 93,367,260 and the resultant capital gain amounted to Kshs. 11,632,740.00

On 5th October 2018, KRA issued ML with an additional assessment amounting to a VAT liability of Kshs.15,589,950.88 pertaining to the month of December 2016 .

ML objected

An objection decision was issued on 20th December 2018 and with ML agreeing to the reviewed tax amount of Kshs. 351,370.00 that was paid on its part ,

ML received a new amended tax notice on 30th June 2021 over the same subject matter that had been finalized and appealed

The renewed tax notice ended up at the TAT.

ML averred that:

  • KRA had previously audited and issued a private ruling on the matter on which it subsequently raised the additional arbitrary assessment. ML stated that this is procedurally unfair, unjust, in bad faith, malicious and amounts to violation of the Appellant’s right to fair administrative action and legitimate expectation as protected under Article 47 of the Constitution of Kenya and the Fair Administrative Actions Act No. 4 of 2015 (FAA Act).
  • Sections 65 & 68 of the TPA creates a statutory legitimate expectation that the private ruling of KRA is binding on it, and it cannot renege on it after ML has relied on it, as is the case herein.
  • Section 68 of the TPA sets a mandatory procedure that private ruling can only be withdrawn in writing and with reasonable cause, and thus the private ruling dated 20th December is binding on KRA and it had never been withdrawn in writing and with reasons for the same.
  • The imposition of VAT on a transaction that purely attracts Capital Gains Tax is unjust, procedurally unfair, unreasonable and in violation of ML’s right to fair administrative action and legitimate expect

KRA responded that:

  • ML’s turnover declared in the VAT returns compared with its turnover declared in its income tax returns indicated there was a variance of an amount of Kshs. 97,437,193.00 incurred in the year 2016, which is VAT chargeable.
  • KRA reviewed ML’s objection on the assessment and issued its objection decision informing ML that its objection was not supported by any relevant documents.
  • ML failed to provide proof of purchases or costs hence the input claim could not be allowed. Pursuant to Section 56 of the TPA, the onus is on ML to prove the said expenditure
  • Section 59 of the TPA empowers KRA to require the production of documents and information to enable him to ascertain a tax liability of a person. Such documents include invoices, copies of stock records, and details of each supply of goods and services among others. ML was unable to provide these documents despite that the burden of proof being on them.

In its ruling 09/09/2022,the Tax Appeal Tribunal observed that:

  • For the first assessment of the same tax period, December 2016, that is the subject of the current appeal, KRA closed off the matter and issued a tax decision based on an audit that it undertook. Therefore, there must have been sufficient documentation provided by ML and reviewed by KRA in arriving at its initial final decision dated 20th December 2018
  • KRA’s actions, inclosing this matter in 2018 in the manner that it did, created a legitimate expectation which ML relied on in establishing that any tax issue relating to the tax period December 2016 was fully audited and settled. In this regard, the Tribunal also confirmed from the pleadings that ML settled the taxes demanded by KRA in its 2018 objection decision without further ado
  • The payment of the taxes determined by KRA in the objection decision issued on 20th December,2018following an audit, created a legitimate expectation on the part of ML that it will not be called upon again to answer to any tax assessment in respect of the same tax period.

As such ML won the case

Can KRA Reopen a closed tax audit issue?

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