AUGUST 2006 KENYA REVENUE AUTHORITY PRESENTATION ON DOMESTIC TAXES DEPARTMENT PRESENTATION ON IMPLEMENTATION OF ELECTRONIC TAX REGISTERS (ETR) IN KENYA AUGUST 2006

This presentation covers the following: Introduction What is ETR? Security in ETR Types of ETR devices Objectives of ETR Advantages of ETR system Sourcing of ETR devices Role of ETR Suppliers Funding of ETR purchases Implementation of ETR system Challenges & mitigating factors Conclusion

1. Introduction A law requiring all VAT registered businesses to install ETR was legislated during FY2004/05. This was refined in 2006/07 to provide that tax invoice shall mean an ETR generated receipt. Aim of ETR system is to enhance voluntary tax compliance by taxpayers. Domestic tax revenue account for over 60% of total government tax revenue. By implementing ETR, Kenya followed footsteps of other countries including Italy, Greece, Poland, Brazil, Argentina, Venezuela, Ukraine, Bulgaria, Yugoslavia, Russia, Romania, Cyprus, Malta, Hungary, Czech, Latvia, Lithuania, Turkey, Brazil, European Union, Germany, Sweden, etc.

2. What is ETR? ETR is an acronym for Electronic Tax Register. It is an electronic device used to record sales data & issue receipts. It is a formal tool for tax compliance. It holds, in a secure way, financial data that can be investigated by revenue authorities at any time. An ETR in its outward appearance & functionality is like an Electronic Cash Register (ECR). However, ECR does not have important security features in ETR.

3. Security in ETR Hardware Security in the ETR The Laden seals. The fiscal memory that cannot be erased Epoxy resin covering the fiscal memory. Catch nicks (Grooves) in the outer seal. Display of serial number that is not changeable. 48 hours power backup/ UPS. The condition of the fiscal register or fiscal printer casing. b) Logical Security in the ETR The ETR stores reconnection reports - time/date stamp of the event each time the Fiscal Memory may be disconnected either for service or maliciously. Automatically self-enforcing daily Z reports.

Security in ETR Cont’d Changes in trader name are allowed up to 10 times only. Changes in VAT are allowed up to 20 times only. The unique Serial No. of ETR shall appear on each receipt to ease quick identification of traders who use unregistered ETRs. The ETR dates are rendered irreversible. This ensures integrity of records so that no room for backdating shall exist. The ETRs shall enforce Password Controls during servicing. Correctness of the fiscal cash register or fiscal printer operations, in particular with respect to the issuing of fiscal documents.

4. Types of ETR devices Electronic Tax Register (ETR) This is a stand-alone device, which is used to issue receipts manually & where the frequency of receipting is not too high. Fiscal Printers (FP) These are high speed printers connected in a computer network to store all sales transactions in its memory, when it issues receipts to taxpayers. It is commonly used in supermarkets. Electronic Signature Device (ESD) This is a device used in conjunction with computerized accounting systems. The invoices pass through the ESD & are signed.

5. Objectives of ETR Main objective of introduction of ETR is to enhance revenue by enforcing improved & secure receipting & record keeping methodologies. Why? Traditionally, VAT registered persons keep specific records in a manner that has been overtaken by technological changes including use of computerized accounting packages. It is also a fact that a no. of traders don’t remit all VAT collected & use it to finance their business activities. Other taxpayers maintain 2 sets of accounts, one for the taxman & the other for themselves.

6. Advantages of ETR system Better management of business by traders. It improves record keeping by traders. It reduces tax audit period. Less paper work by traders. Less tax disputes and court cases. Reduce fraudulent accounting & improved VAT revenue. More jobs for local technicians. Cut cost of records by taxpayers since daily, monthly & annual report will automatically be done by ETR.

Anybody can supply one or several models of ETR. 7. Sourcing of ETR devices As at June 2006, Kenya had 17 suppliers supplying a total of 67 approved devices. Anybody can supply one or several models of ETR. However, to ensure full compliance with gazetted technical specifications, the gadgets must be approved by a multi-disciplinary team established at KRA.

8. Role of the Supplier To ensure availability of the ETR devices. Ensure the supply and installation of the device. Train the registered taxpayer on how to use the device. Seal the device after successful installation. Provide constant after sale support in case of any technical problems. Ensure continuity of the model by maintaining spares/backups for 5 years after the model is sold. Improve the ETR system through continuous innovation. Ensure availability of technicians to maintain the ETR device.

9. Funding of ETR purchases VAT law allows a taxpayer who has purchased an ETR device to deduct cost of purchase from VAT payable. Upon purchase, taxpayer is required to submit documents showing evidence of purchase, installation & usage. The Commissioner, upon satisfaction that taxpayer is compliant, approves the documents to enable deduction of the cost of ETR.

10. Implementation of ETR system The implementation of ETR was done in phases & on sector basis. Brochures on the same were also prepared and distributed thro’ all KRA offices. Sensitisation seminars on implementation of ETR were conducted in all major towns in the country. Enforcement teams were appointed in all regions to enforce implementation by visiting taxpayers premises. Consequently, compliance has risen to over 35% of VAT registered taxpayers. Recent legislative amendments requiring tax invoices to be ETR compliant is expected to boost compliance to 80% by Dec. 2006.

The cases are filed in different courts across the country. 11. Challenges & Mitigating Factors Litigation One of the major challenges of ETR implementation is litigation. A number of traders have moved to court to challenge ETR implementation. Currently, there are 8 suits involving ETR, out of which courts have granted ‘orders of stay’ against implementation of ETR in 6 cases. The cases are filed in different courts across the country. KRA lawyers are following upon the cases, while enforcement of ETR continue on those who are not direct beneficiaries of the court orders.

Hostility and Negative attitude There has been hostility from sections of the business community, especially an organization called United Business Association. However, KRA has intensified a publicity campaign, which kicked off with a persuasive approach followed by aggressive & assertive approaches. In the 1st phase of campaign, KRA emphasised on benefits of ETR to traders & the public. 2nd phase dealt with the need to pay correct taxes & that ETR will stop tax evasion. 3rd phase involves appealing to the public to insist on an ETR receipt whenever they buy goods and/or services. KRA has been holding consultative meetings with stakeholders & organized groups to drum up support for ETR.

Pricing Prices of the ETR devices continue to be one of the reasons for the resistance. Traders argue that those prices are exorbitant as compared to the prices abroad. On average, the prices range between Kshs. 30,000 to Kshs. 150,000 (i.e. US$ 400 – 2,000). KRA continues to negotiate with suppliers to adjust ETR prices downwards. It is expected that the prices will drop further as demand for the ETR increases.

Technical Challenges There are a no. of complaints from traders on technical problems arising during & after installation. Some of the complaints include: Machines not functioning or some faults occurring after installation. After complaints are reported, the response from suppliers is not as prompt as it ought to be. Problem of incompatibility between the ETR device & some software used by taxpayers. All these issues are being addressed by suppliers & KRA technical team.

Political interferences Implementation of ETR has generated opposition from some politicians who support traders who do not want to install ETR. However, the President of Kenya is very emphatic that people should pay their taxes if they expect the govt. to deliver services to them. The Minister for Finance is also very categorical about ETR & has in a no. of occasions drummed up support for ETR system. A no. of professional associations & trade unions are also supportive of ETR system.

Cost of Installation Cost of ETR installation is not VAT deductible. Consequently, traders have raised major concerns about the high costs of installation especially where, there is need to change the software in order for it to be compatible with the ETR, particularly those that requires networking. KRA is consulting stakeholders to solve the problem.

11. Conclusions Overall, implementation of ETR has been slow & frustrating due to challenges above. However, there is a resolve across Government to soldier on with the ETR implementation. An ETR enforcement team has been established countrywide comprising of technical officers & revenue protection police. KRA will continue to beef up the team to ensure effective enforcement. The End.