The Kenya Revenue Authority (KRA) introduced the VAA system in 2019 to detect discrepancies between invoices in VAT returns. The tool aims to reduce claims of input VAT on fraudulent invoices, but has significantly increased the administrative burden for corporations since it was introduced.
This issue has affected large businesses, which have a significant number of different suppliers, because the VAA tool matches invoices and places the responsibility for providing the transactional evidence on the buyer. Companies are being forced to redirect their resources to resolving VAT discrepancies created by the VAA.
“The introduction of VAA has been costly to businesses due to the time and consultancy fees required in managing the assessments. Challenging the VAA requires you to make numerous applications and provide copies of invoices as well as proof of payments, which might consume a lot of unbudgeted time. Many business also have to engage tax consultancy firms to facilitate the process which is an added cost to them,” said one tax manager at a multinational retailer in Kenya.
Furthermore, the tool does not take into consideration the different timeframes of claims or suppliers grouping together invoices, which is disproportionately affecting the retail sector.
“Big retailers could have thousands of discrepancy notices each month, which could be down to timing differences in claims and their suppliers batching invoices together. While the original intention of the VAA system was to identify fraudulent evidence, it is creating a compliance issue,” said Nikhil Hira, tax consultant at Bowmans Kenya.
This is why a group of retail companies are going to Kenya’s High Court to get the rules on the VAA system annulled, a tax lawyer involved in the matter told ITR.
“Here, we’re saying that what the VAA system is doing is unfair to the taxpayer, the recipient of the goods and it’s putting an unnecessary administrative burden on both businesses and individuals,” the tax lawyer said.
“Retailers assume they are selling to the final consumers and therefore VAA arising from purchasers claiming their receipts is invalid,” said the retail company tax manager.
This group of taxpayers are arguing that the administrative burden created by the VAA system goes against Article 47 of Kenya’s Constitution, the Fair Administrative Action Act, which says that the government has to be fair to citizens and cannot burden them with technicalities.
“Every person has the right to administrative action which is expeditious, efficient, lawful, reasonable and procedurally fair,” the Act states.
Although the issues with the VAA system weigh heavily on the retail sector, there is potential for businesses from other sectors to challenge the KRA.
“It [the group pursuing litigation] is made up of retail-sector companies and I have suggested that we may bring other industries in, but it might be necessary for each sector to bring their own case,” said the tax lawyer.
MNEs have voiced their concerns over raising litigation in Africa because tax courts have generally been biased towards the tax authority with regards to VAT legislation. However, the Kenyan taxpayers noted that in the past few years courts have become more impartial.
“I’ve seen that on tax cases that were winning slightly more than were losing. The courts are quite fair, the problem is that we don’t have judges that are fully competent in tax law,” said the tax lawyer.
VAA system needs tweaks to work
The VAA system works by reconciliation of the purchase and sales invoices by matching them exactly. Following the detection of inconsistencies in invoices, the tool will communicate the discrepancy to both parties and then raise an auto assessment on the buyer for any tax payable.
The process to rectify the assessment remains a manual exercise because the buyer has to scan invoices and then send them to the KRA. Furthermore, companies only have 15 days after receiving the discrepancy notice to tell the tax authority that they will either accept the assessment and reverse the input VAT or provide a copy of the invoice.
“There has been an outcry by many business complaining about the VAA in many KRA forums. Forums organized by KRA to discuss different issues have been turned to a VAA forum by many queries on the subject matter,” said the retail company tax manager.
“The theory is right, but the way they’re implementing might be wrong. Legally, it is clearly wrong. If you’re going to attack the recipient, that’s the wrong way to go about it. The responsibility should be with the supplier,” said Hira.
While taxpayers agree that VAA is a step in the right direction to fight VAT fraud, they have suggested that some minor changes to the VAA system would help to alleviate the administrative burden and strengthen overall compliance.
The system needs to allow for claims when invoices are submitted in different months. It also needs to be able to process numerous invoices batched together, as well as introduce a de minimis threshold.
Another issue is that businesses don’t know if their suppliers will pay the tax or not because there is no tool to check whether the invoice they have received is fake, whereas the KRA can check. Extending this verifying mechanism to taxpayers would allow them to enforce compliance further.
The VAA system is a blanket approach to fighting fraud, meaning legitimate processes are being affected. Although it is clear that putting the onus on buyers to validate suppliers’ invoices is unfair, it remains to be seen whether the Kenyan court will agree. A court date has not been set yet.
