ANTIAVOIDANCE PROVISIONS & DIFFERENCES BETWEEN AVOIDANCE & EVASION topwiseconsultants@gmail.com
CPA Dr. JOSEPH MUCHIRI, PhD. Presenter CPA Dr. JOSEPH MUCHIRI, PhD. TOPWISE CONSULTANTS topwiseconsultants@gmail.com
Outline Definitions: avoidance & evasion Impact Reasons Ways of evasion Ways of avoidance Antiavoidance provisions topwiseconsultants@gmail.com
Definitions & impact Avoidance-legal & professional Evasion-illegal & unprofessional Impact: To reduce tax burden/exposure topwiseconsultants@gmail.com
Reasons for avoidance & evasion Lack of effective tax planning measures Ignorance/Illiteracy/Inadequate knowledge of taxation High tax rates Complexity of laws/rules/regulations Inefficient/incompetent tax authorities/officers Corruption/politics/ethics Lack of self–discipline Wealth creation (payback) topwiseconsultants@gmail.com
Ways/schemes of evasion Willful failure to file return Willful failure to collect & remit tax Preparing false tax returns/statements Making false claims Expenses Refund claims Deliberately under/non declaring taxable income Keeping multiple sets of books Role of middlemen Aid/abetting in the preparation of false documents Conspiracy to impede or defeat the collection of tax topwiseconsultants@gmail.com
Schemes cont… Transferring unreported income to tax havens Creation of tax losses & c/f or backward (balancing deduction) topwiseconsultants@gmail.com
Ways/schemes of avoidance Claiming an income as totally exempt from tax e.g capital gains at NSE interests from POSB savings bank or interests arising from tax reserve certificate Interests accrued on deposits to HOSP of up to sh3m Interests from infrastructure bonds of >=3 years By claiming reliefs and other allowances as per S.15(2). Investing in areas where income is qualifying since withholding tax is final eg in SACCOs Through shortfall distribution of dividends topwiseconsultants@gmail.com
Anti avoidance provisions Sec 62: Return on exempt income Sec 18: Branch of non resident business 18(4) NR Non WTSD remuneration NA NR WTSD deduction allowed upto 150k executive and general administrative expenses allowed on discretion of CDT 18(5)-expenses( interest, royalties or management or professional fees) of a branch to HO(NR) NA Section 16(2j):Thin capitalization (excluding FIs) Sec 24: Avoidance on non distribution of dividends (short fall) Sec 15(4) loss c/f Sch. 2(part II(11)): Balancing deduction topwiseconsultants@gmail.com
Provisions cont… Other initiatives by KRA Sec 52A(4)-Return on compensating tax Charitable donations regulations(2007) Transfer Pricing Rules(2006) Sec 23: Transactions designed to avoid tax liability chargeable Sec 85 of TPA-penalty Other initiatives by KRA Regular audit Leverage on IT-iTax, ETR topwiseconsultants@gmail.com
Provisions cont… Sec 24: Shortfall distribution of dividends Consider the following for a firm that distributed sh 50m. Sh m sh m Total sh m Operating income 100 Investment 40 Tax@30% (30) (12) PAT 70 28 Retention (S.24(4)) CDT @60% (42) - Distributable 28 28 56 Distributed (50) Shortfall 6 Taxes on shortfall: W/T: 5%x6m= 0.3m Late payment: 20%x0.3m=0.06m 0.36 ( This excludes the 1%pm simple interest (S.38 TPA) topwiseconsultants@gmail.com
Provisions cont… Sec 7A: Compensating tax (avoidance on corporate tax) A firm had a profit ater tax of sh 4.2m, tax refund of sh 360000. It had paid divided of sh 6.4m and received divided of sh 1500. Compute the compensating tax. Divided tax account Refund 360 Tax paid 4200x3/7 =1800 Divided paid 6400x3/7 2743 Div received 1500x3/7=643 Compensating tax 660 topwiseconsultants@gmail.com
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