Conceivable impacts of tax amnesties

By Ali Amersi

Tax compliance is a fundamental characteristic of meeting tax obligations within any jurisdiction. In situations where there is a shortfall of revenue collection and a lack of conformity, governments offer tax amnesties to increase revenue collection.

Importantly, the objective of most tax amnesties is essential to increase revenue collection through voluntary compliance by way of tax declaration, and simultaneous implementation of penalties for failure to heed the amnesty.

Recently, a tax amnesty was given in Kenya. It necessary to understand how past amnesties in Kenya have impacted the country, and how the current amnesty will do as well.

In issuing the amnesty, the Finance Act 2016 was amended and recently assented to in September last year, by Parliament, to include provisions for the Amnesty. Section 39 of the Finance Act makes provisions for a significant amendment to the Tax Procedure Act 2015, by establishing new sections within the Act. These are are section 37A and 37B that give rise to the provisions to tax amnesty, which primarily provide that taxpayers will have the opportunity to declare their foreign sources of income. Importantly, the amnesty will be valid as per section 1(b) of the Finance Act from January 19, 2016 and will end on December 31, 2017 as per Section 37B of the Tax Procedure Act.

The amendments to the Tax Procedure Act occurred as Kenya recently signed Mutual Administrative Assistance in Tax Matters (MCMAA), which helps the country meet the Common Reporting Standards (CRS) requirements, and simultaneously allow for an exchange of tax information between all signatories; over 90 countries signed the MCMAA, 56 of which have implemented the CRS as of January last year.

The impact of MCMAA and CRS will mainly see Kenya Revenue Authority (KRA) gain tax information about all Kenyan residents, individuals and corporations, who have incomes within the signatory countries.

In recognising that Kenya operates a source-based taxation system, by way of Section 3(1) of the Income Tax Act and through the confirmation in Motaku Shipping Agencies Limited vs. Commissioner of Income Tax (Civil Suit No. 60 of 2013), business that are conducted partly in and partly outside Kenya and residents who have some income accruing from outside Kenya shall be deemed to have accrued the whole amount in Kenya, hence the income will be taxable in Kenya.

The Amnesty allows residents to declare their foreign income without being questioned about the source of their income, and eliminates all past penalties that have arisen for a failure to declare. However, after the end of the amnesty period, with the CRS in effect, it is likely that residents who have failed to report their foreign income will be charged substantial penalties.

Kenyan experience

The impact of the previous tax amnesties – in 1993 on revenue and in 2004 on indirect taxes with a key focus on value added tax – subsequently increased compliance and hence revenue collection. Throughout both periods there was a strong relationship between growth of tax revenue and tax amnesty.

The empirical evidence of the same is available from a study done by Tom Mutemi Kilonzo in his article “Effects of Tax Amnesty on Revenue Growth in Kenya”, which shows an overall positive correlation between revenue collection and the implementation of tax amnesties in the country.

Judicial comparison  

Some have argued that the tax amnesty offer legal means for corrupt individuals, both former politicians and people in business, who have stolen state money to bring it back into the country “lawfully”.

Nevertheless, developing countries with sub-optimal revenue collection have seen a dramatic increase in inflows of foreign currency after the implementation of the tax amnesties. As a case in point, as of October 2016 the finance ministry in Indonesia, a signatory country to the MCMAA, collected $7.5 Billion (Sh750 billion) after the implementation of a tax amnesty.

However, it is worthy to note that there are penalties of between 2 and 5%, depending on the type of asset and the date of declaration within Indonesia. The nil penalties within the Tax Procedure Act 2015 in Kenya may see an even greater rise in long-term revenue collection.

Similarly, Argentina implemented an amnesty in March last year; it is estimated, in accordance to Gabriel Martino, president of HSBC Bank Argentina, that there will be declared funds of over $60 billion (Sh6 trillion).

Closer home, South Africa’s s Tax Administration Act No. 28 created the implementation of an amnesty like Kenya’s that came into effect on October 1, 2016, and will last until 30 June 2017. The South African amnesty has implemented a levy of between 5 and 10% depending on whether the asset is repatriated in South Africa; the same may be applied in Kenya depending on KRA regulations.

Notwithstanding that individuals who stole State money will not be prosecuted, it is expected that there will be a necessary increase in investment within the country.
Nonetheless, in the situation the amnesty is not optimally implemented, it is likely that the embezzled funds will remain stored in foreign countries, and regardless of the Governments attempts to recover the funds and prosecute individuals; the failure of both objectives is eminent.

Conclusion

Although the guidelines for the implementation of the Tax Amnesty are not fully published, it is likely, based on past impact of tax amnesties, and amnesties in other jurisdictions, that there will be a subnational increase in revenue collection. Moreover, with the future penalties that could accrue from the failure of the declaration, it is advisable that residents with foreign income seek further consultation from KRA, and professional tax consultants.

Furthermore, with the increased amount of data available from the CRS, Government will be able to set policies that will positively impact the economy. However, with consistent remorseful levels of corruption, the lingering question of how the revenue will be used will remains in question.