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What is Alternative Dispute Resolution (ADR) in Kenya?

Mich&Ronia Consultants > Blog > Business and Financial advisory > What is Alternative Dispute Resolution (ADR) in Kenya?

Alternative Dispute Resolution (ADR) in Kenya offers an efficient way of resolving and managing tax disputes outside the traditional judicial processes. Instead of relying on courts of law or quasi-judicial bodies like the Tax Appeals Tribunal (TAT), ADR provides a framework for quicker dispute resolution. ADR encourages cooperation, reduces the burden on the judicial system, and ensures disputes are settled in a timely and cost-effective manner.

ADR is particularly beneficial in tax disputes because it promotes collaboration between the Kenya Revenue Authority (KRA) and taxpayers. It helps resolve disagreements before they escalate into full-blown legal battles, which can be time-consuming and expensive.

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Key Players in ADR: Roles and Responsibilities

An ADR process typically involves three main parties:

  1. Taxpayer – The individual or organization disputing the tax decision.
  2. Commissioner – The representative from the Kenya Revenue Authority (KRA) involved in the tax dispute.
  3. Facilitator – An impartial party who oversees the process but does not impose any decision.

Each party has a specific role in ensuring the process runs smoothly. Their responsibilities include:

  • Upholding decorum: All parties should maintain professionalism and confidentiality throughout the process.
  • Fair participation: Parties must participate in discussions with fairness and diligence.
  • Full disclosure: Both sides should provide all relevant facts and materials concerning the tax dispute.
  • Meeting attendance: It is critical to attend all scheduled ADR meetings.
  • Timely adherence: The parties must stick to the timelines set for resolving the dispute.

These roles ensure that ADR remains a productive and fair process for all involved, fostering transparency and mutual trust between the taxpayer and KRA.

Why ADR is Preferred Over Litigation

The Alternative Dispute Resolution (ADR) process is gaining traction in Kenya for several reasons:

  1. Cost-Effective: Traditional litigation can be costly, involving hefty legal fees and long court processes. ADR offers a cheaper and faster alternative to resolving disputes.
  2. Confidential: Unlike court cases, which are often public, ADR proceedings are private. This confidentiality protects sensitive financial and tax information.
  3. Preserves Relationships: ADR promotes an amicable resolution of disputes, which helps maintain a working relationship between the taxpayer and KRA, reducing hostility.
  4. Without Prejudice: ADR discussions are without prejudice, meaning the information shared during negotiations cannot be used against either party in future litigation.
  5. Encourages Compliance: A negotiated settlement through ADR increases the likelihood of both parties adhering to the agreement, thus boosting compliance.

The Kenyan Constitution encourages the use of ADR, emphasizing it as a principle for resolving disputes amicably and efficiently, thereby reducing the strain on the judicial system.

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Types of Tax Disputes Suitable for ADR

Not all tax disputes are eligible for resolution through ADR. However, certain types of disputes can benefit from the process, such as:

  • Disputes before tax assessment confirmation: This applies when a tax assessment is still under review and the parties want to settle without proceeding to formal litigation.
  • Disputes with mutual agreement for self-review: Even after a tax assessment is confirmed, parties can agree to revisit the assessment for a self-review to resolve the dispute.
  • Cases pending before Courts or Tax Appeals Tribunal: Some disputes already before the courts or TAT can also be settled through ADR if the parties desire an out-of-court settlement.

However, the following exceptions apply where ADR may not be suitable:

  • The settlement would violate the Constitution or revenue laws.
  • The dispute involves complex technical legal interpretations.
  • It is in the public interest for the courts to provide judicial clarification.
  • There are already undisputed judgments or rulings.
  • One party is unwilling to engage in the ADR process.

ADR Timelines and Framework

Under the Tax Procedures Act (TPA) of 2015, ADR must be concluded within 90 days as stipulated in Section 55. However, court-initiated ADR can be subject to timelines granted by the courts. The TPA outlines an Internal Dispute Resolution Mechanism (IDRM) that starts with the taxpayer’s objection to a tax decision made by the Commissioner. If this objection escalates, it can lead to an appeal at the Tax Appeals Tribunal or Courts of Law.

To improve the effectiveness of IDRM, the ADR framework was introduced as a voluntary and facilitated discussion between the taxpayer and KRA. Importantly, ADR is a mediation process, not an arbitration. The facilitator does not impose any decisions but rather helps both parties reach an agreement.

ADR provides flexibility and avoids the procedural hurdles associated with court cases, such as technical requirements, delays, and the high costs of litigation.

Global Success of ADR in Tax Administration

Today, ADR is widely adopted globally as a preferred method for resolving tax disputes. Several countries have implemented ADR with great success in reducing case backlogs, improving compliance, and fostering better relationships between tax authorities and taxpayers. Kenya’s ADR framework draws on the experiences of these global tax administrations, making it a promising alternative to litigation for tax disputes.

By using ADR, both the Kenya Revenue Authority and taxpayers benefit from an expedited process, higher compliance levels, and lower uncertainty over case outcomes. For taxpayers, ADR represents a shift away from enforcement towards trust and facilitation in resolving disputes.

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Conclusion

In conclusion, Alternative Dispute Resolution (ADR) offers a practical and efficient way for taxpayers and the Kenya Revenue Authority (KRA) to resolve disputes without the need for lengthy and costly litigation. ADR encourages transparency, preserves relationships, and boosts compliance. Moreover, Kenya’s ADR framework is designed to provide timely and flexible dispute management, giving both parties a chance to settle their disputes out of court.

For more detailed assistance on ADR and its application to tax disputes, visit Michronia Consultants or contact us at the details provided below.

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