Tax Planning, Avoidance and Evasion
Planning
Tax Planning, Avoidance and Evasion
Syllabus tag: KASNEB CPA | Advanced Level | CA35S1 Advanced Taxation
1. Definitions and the spectrum
Tax planning: arranging one's affairs to take advantage of tax reliefs, exemptions, and incentives that Parliament intended to be available. Fully legal and encouraged. Example: timing capital expenditure to maximise capital allowances; utilising pension contribution deductions.
Tax avoidance: using legal means to reduce tax but in ways Parliament did not intend — exploiting gaps in the law or artificial arrangements. Not illegal per se but subject to challenge by the KRA and courts.
Tax evasion: deliberately concealing income, overstating deductions, or falsifying records to reduce tax. Illegal — constitutes a criminal offence.
2. The general anti-avoidance rule (GAAR)
Section 23 of Kenya's ITA contains a GAAR. The Commissioner may adjust the tax liability of any person where a transaction was entered into primarily to obtain a tax benefit that was not intended by the legislation. The arrangement must have little or no commercial substance beyond the tax advantage.
If the GAAR applies, the Commissioner can treat the transaction as if it had not occurred, or as if it had been structured in a commercially rational way without the tax benefit.
3. Specific anti-avoidance rules
Beyond the GAAR, the ITA contains specific provisions targeting common avoidance schemes: thin capitalisation rules (deductibility of interest limited where debt:equity exceeds 3:1); controlled foreign company (CFC) rules (attribution of offshore profits of Kenyan-controlled companies in low-tax jurisdictions — proposed under BEPS reforms); transfer pricing rules (see separate note).
4. Disclosure obligations
Kenya's Tax Procedures Act 2015 requires taxpayers to disclose all material tax positions in their returns. Failure to disclose a material omission attracts a penalty. Voluntary disclosure programmes allow taxpayers to come forward and settle underpaid tax with reduced penalties and no criminal prosecution.
5. Tax evasion penalties
Under the Tax Procedures Act: 100% penalty on the unpaid tax for an incorrect return; 25% penalty for late filing; 2% per month interest on overdue tax. Criminal prosecution may result in fines and imprisonment. The KRA has powers to: assess on best judgment, enter premises to inspect records, freeze bank accounts, and institute proceedings in court.
6. Professional obligations
A tax adviser who knowingly assists a client in tax evasion may face: removal from the professional register; criminal prosecution; civil liability. The IESBA Code requires professional accountants to refuse to assist in illegal acts. The accountant's duty of confidentiality does not extend to concealing illegal acts from regulators.