Treatment of Director’s Fees for Corporate Tax and PAYE Purposes

CASE STUDY:AFYA X-RAY CENTRE LIMITED VS KRA

AXCL was served with a notice of intention to audit on 8th August 2016. This audit was to cover the period of 2012 to 2015, with a specific focus on the verification of the amounts declared in the income tax returns from employment, business, and rental income.

AXCL was notified to avail its record and books of account for the period of income covered on or before 15th August 2016.

Consequently, KRA conducted an in-depth audit and issued AXCL with its preliminary findings on 5th September 2016. Based on the information and records provided by AXCL, the investigation established that there was under declaration of sales in that there was a variance between the income received and that declared in the financial statements. That in the analysis of the records it was found that the director withdrew amounts from the company for personal use. Further, AXCL failed to deduct PAYE from the staff on its payroll. In sum, the investigation found AXCL had a total tax liability of Kshs. 59,010,668.

Vide a letter dated 30th December 2016 AXCL filed an objection raising concern on KRA’s computation of corporation tax and PAYE on director’s drawings. KRA acknowledged receipt of AXCL’s objection and requested for documents in support of AXCL’s objection , vide a letter dated 17th January 2017. AXCL was expected to provide these documents by 27th January 2017.

AXCL wrote back to KRA on 27th January 2017, informing KRA that it had been unable to collect all the documentary evidence within the short period allocated. That AXCL disclosed that it paid the undisputed tax on PAYE. Additionally, AXCL requested a time extension of 14 days to avail of those documents. AXCL was granted the 14-day extension as requested but did not utilize it. As result KRA rendered its objection decision on 28th February 2017, confirming the total tax payable by AXCL of Kshs. 60,545,683. AXCL was informed of its right to appeal the decision

AXCL appealed to the TAT

In this article, we will dwell on the treatment of directors’ fees only.

AXCL argued that:

KRA had not recognized one cost that they did by themselves which is the Directors fees. They assessed PAYE on it, but they did not allow it as an expense for corporate tax purposes in accordance with the income Tax Act.

KRA intended to collect from both the credit side of the bank statement by calling it an income for Corporate Tax and to collect it from the debit side by calling it a Director’s fee. This amounts to double taxation

KRA responded that on the issue of PAYE,KRA established that the Director of AXCL company withdrew lump sums from the bank for personal use. And it was established that it was for personal use because the director could not prove how these cash withdrawals were being used to offset office expenses as alleged. Therefore KRA treated these drawings and subjected them to PAYE as per section 5 (2) of the Income Tax Act.

In its decision on 17/12/2019, the TAT observed that:

KRA collected from both the credit and debit side of the bank statement with regards to the PAYE, all the while not allowing it as an expense for purposes of corporate tax. If this is allowed, AXCL would suffer the effects of double taxation. The Tribunal was of the considered view that a taxpayer should not be overburdened all in the name tax collection. Correlatively, the taxing authority should not collect more than is due from a taxpayer

KRA was ordered to do tax recomputation in consideration of the industry practice

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