Tax Fraud

Case Study:Commissioner of Domestic Taxes v Econobuild Limited (Income Tax Appeal E119 of 2021) [2024] KEHC 7708 (KLR) (Commercial and Tax) (27 June 2024) (Judgment)

In  the  year 2018, KRA investigated Econobuild’s tax affairs to ascertain its tax compliance for the period January 2015 to December 2017. The Commissioner, noted that Econobuild used invoices from eight companies that would print and sell invoices to traders for a commission without actually supplying goods and thereafter the traders would use the invoices to file their returns and in their financial statements to account for expenses to reduce their tax liability. Consequently, KRA issued a tax demand dated 16th April 2018 for underpaid taxes of Kshs. 18,119,941.00, which constituted input VAT of Kshs. 6,302,588.00 and Corporation Tax of Kshs. 11,817,353.00.

Econobuild objected to the demand because the input VAT was rightly claimed and they had all the tax invoices for all the supplies; KRA ought to have demanded the taxes from the suppliers who were the agents for collection and remission of VAT and not from it, the customer, as that would amount to double taxation.

Through letters dated 24th August 2018 and 10th September 2018, Econobuild provided agreements for subcontracts, site weekly schedules, daily workforce records, petty cash vouchers, site labour schedule and weekly labour wages for Pangani, Githuri and Parklands sites, invoices and delivery notes, Cheques and payment slips of the profiled suppliers. In good faith, Econobuild paid the principal VAT, which KRA acknowledged in its letter dated 12th February 2019.

In the letter, KRA noted from the documents that Econobuild started filing in iTAX in July 2015 yet the invoices from the profiled suppliers were from July 2015 to May 2017. Therefore, KRA raised an additional VAT assessment of Kshs. 886,565.00 for the period January to July 2015.

KRA also found that Econobuild did not incur labour costs as the documents on labour and subcontractor works had no direct link to the profiled suppliers. It reasoned that if the labour costs were provided, the documentation would be in their name and not Econobuild’s. Thus, it raised an assessment Corporation tax of Kshs. 13,479,664.00 from the total invoice amount of Kshs. 44,932,211.00 from the ledger provided for the period January 2015 to December 2017.

KRA acknowledged receipt through its letter dated 12th February 2019, and further mentioned that the amount would be assessed with the 75% fraud penalty

Econobuild objected to the assessment through its letter dated 11th March 2019. Though Econobuild agreed to pay the additional VAT amount, it requested KRA to cancel its demand for Corporation tax because the expenditure was truly incurred, despite the supplier’s non-compliance.

KRA requested Econobuild for more documents. Ultimately, it issued its objection decision dated 9th May 2019, confirming the assessment and seeking immediate payment of Kshs. 13,479,664.00.

Dissatisfied, Econobuild lodged an appeal before the Tax Appeals Tribunal (. Through its judgment dated 13th May 2021, the Tribunal allowed the appeal and set aside the Commissioner’s objection decision of 9th May 2019.

Aggrieved, KRA appealed to the High court, on the following grounds:

• That the Honourable Tribunal erred in law and in fact in failing to find that Econobuild failed to keep the necessary records contrary to Section 54A of the Income Tax Act as read with Section 23 of the Tax Procedures Act, 2015.
• That the Honourable Tribunal erred in failing to find that KRA has the powers to call for production of documents under Section 58 and 59 of the Tax Procedures Act, 2015.
• That the Honourable Tribunal erred in law and in fact in failing to appreciate that the Kenyan tax regime is a self-assessment tax regime under Section 52B of the Income Tax and Section 28 of the Tax Procedures Act, 2015.
• That the Honourable Tribunal erred in law and fact in failing to find that KRA has the powers to issue additional tax assessments under Section 29 and 31 of the Tax Procedures Act, 2013 within 5 years based on available information.
• That the Honourable Tribunal erred in law and in fact in shifting the burden of proof to KRA contrary to Section 56(1) of the Tax Procedures Act, 2013 and Section 30 of the Tax Appeals Tribunals Act, 2013.
• That the Honourable Tribunal erred when it framed the wrong issues for determination thus asked itself the wrong questions and in doing so arrived at the wrong conclusion.
• That the Honourable Tribunal arrived at its judgement based on a misapprehension of the law and the facts presented before it.
• That the Honourable Tribunal erred in law and fact in failing to consider the evidence and submissions tendered by KRA;
• That the Honourable Tribunal misapplied the law and facts and by ignoring all materials facts placed before it and based its judgement on a biased approach without due regard to the balance of the scales of justice.

In its ruling on 27/06/2024, the High Court observed that:

• According to Section 56 of the TPA, the burden to prove that a tax decision is incorrect is on the tax payer. Similarly, Section 30 of the Tax Appeals Tribunal Act provides that:

“In a proceeding before the Tribunal, the taxpayer has the burden of proving where an appeal relates to an assessment, that the assessment is excessive.’’

• The record shows that vide its letter dated 12th February 2019, KRA contended that Econobuild used invoices from the profiled traders to account for labour expenses in its financial statements yet there was no evidence that the supplies were made. Although Econobuild claimed that payment for the labour services was by cheques, there was no evidence of payments by the profiled suppliers to the list of casuals and subcontractors or to Econobuild to show that they transferred for their payment. There was also no evidence of the provision of the services.
• Before the Tribunal, KRA questioned why Econobuild acquired additional labour costs from the profiled suppliers yet the law allows deduction of expenses wholly and exclusively incurred in the generation of income. KRA also questioned why Econobuild would outsource and pay persons not contracted by an agreement to provide labour while it was in charge of hiring, paying and dismissal of the workers. It therefore reasoned that the use of profiled suppliers’ invoices to claim for more labour costs was misleading and crafted in such a manner as to reduce tax liability.
• the Tribunal erred by placing the burden of proof upon KRA on the basis that fraud must be strictly proved. The Tribunal questioned what kind of evidence would be considered sufficient to prove that indeed the goods and services were supplied considering the assessment for 2015 to 2017 was done in 2018.  The Tribunal also erred by failing to appreciate that KRA has the powers to issue additional tax assessments under Section 29 and 31 of the Tax Procedures Act, 2013 within 5 years based on available information.

As such KRA won