The Kenya Revenue Authority (KRA) has opened a new battle front with lawyers by seeking to collect tax on interest earned on billions in cash held in client accounts, a high-profile move that has sparked a wave of shock in the legal profession.
Daily business has obtained correspondence in which KRA demands tax details for a law firm dating back five years, even as the Law Society of Kenya (LSK), a professional body for lawyers, hits back at what it claims are an excess by the taxman which is under pressure to collect Sh2.57 trillion in taxes this financial year.
In an inspection notice sent to a law firm, the KRA questions the fact that since 2018 the law firm has benefited from a perpetual value added tax (VAT) credit, which means that he paid more to the taxman and therefore has no tax obligation.
“We would like to carry out an audit of your VAT credits as shown in your i-Tax returns for the periods from January 2018 to date,” the KRA said in a letter written in September this year.
The documents that the KRA wants to obtain from the company to carry out the verification include purchase invoices, sales invoices, bank statements and monthly Electronic Tax Register (ETR) reports.
“We would like to inform you that this verification is limited to the area specified above, KRA reserves the right to conduct further verification and/or audit when new information becomes available,” the notice read of the KRA, signed by an official of the Department of Internal Revenue.
While the KRA believes that some law firms have defrauded the taxman, lawyers, through the LSK, insist that the taxman is fishing and unfairly targeting its members.
Money in customer’s account
LSK President Eric Theuri said a lawyer maintains two accounts: one for the company’s profits and the other to hold the client’s cash.
Mr Theuri said lawyers normally invest the money in the client’s account and earn interest. Interest is paid to the customer.
“What happens is that the KRA goes to the client’s account, it checks how much a lawyer has had and invested on behalf of the client and takes the interest generated as income for the lawyer,” Mr Theuri said .
Once the KRA assesses the interest as income for the lawyer, it levies a withholding tax of 15 percent if the money was invested in a fixed deposit account, Mr Theuri added.
However, the lawyers say they do not keep the money and the interest passes to the client.
The aggressive maneuvers of the tax authorities, a recent phenomenon according to lawyers, have annoyed the LSK which has asked its more than 20,000 members who feel harassed by this approach to file an official complaint.
“The Council of the Law Society of Kenya is extremely concerned about the increasing number of cases and complaints from the public, particularly by Advocates, against the KRA in relation to arbitrary tax assessments and failure by the KRA to follow a due process or established procedures. under the relevant tax laws in the execution of their mandate,” said Florence Muturi, Director General of the LSK in a notice to members.
“The complaints include auditing and freezing of privileged trusts and client accounts, unreasonable requests for confidential and privileged documents and information,” Ms Muturi added.
High Net Worth Individuals
She asked the aggrieved members to formally register and submit their complaints to the Society.
“This will enable us to formally lodge a complaint with the KRA and also formulate appropriate responses to this affront,” she added.
Mr Theuri said if KRA did not comply, it planned to go to court.
It is a double tragedy for legal practitioners who recently bowed to pressure and agreed to be appointed reporting agents in the fight against dirty money, a move they had previously fiercely opposed, arguing it would violate “lawyer professional secrecy”.
President William Ruto’s government, which has an economic agenda with the International Monetary Fund (IMF), is under pressure to reduce the country’s debt vulnerabilities and achieve the required debt-to-gross domestic product (GDP) ratio of 55 % by 2029.
“This will involve the timely implementation of reforms aimed at broadening the national tax base and improving tax compliance,” the IMF said in a statement released last week.
Professionals such as lawyers and high net worth individuals are among the taxpayers who, according to the National Treasury in one of its reports, do not pay their fair share of taxes.