Mediation is one of the alternative mechanisms that emerged as a way of solving disputes out of court. It involves the voluntary resolution of a dispute where a neutral third party, known as a mediator, facilitates the process and aids the parties in consensus building. The disputants also have control over the outcome. Majority of the Kenyan communities used mediation as one of their conflict resolution mechanisms. For instance, it was used to determine disputes relating to allocation of resources within the community. Though it had been in use for decades, mediation was legitimized in 2010 by article 159 (2) (c) of the Constitution which recognizes resolution of disputes using alternative dispute resolution mechanisms.
Mediation has been used to solve disputes in tax, employment, construction and insurance claims among others. This article will focus on mediation of tax disputes in Kenya and will analyze the nature of the mediation process and whether it conforms to mediation principles such as neutrality, voluntariness of the process and parties having control of the process.
Alternative Tax Dispute Resolution in Kenya
Alternative dispute resolution (ADR) in tax matters was introduced in Kenya by the Alternative Dispute Resolution Framework which was launched in July 2015. The Framework tasked Kenya Revenue Authority (KRA) with internally overseeing alternative tax dispute resolution. Resolution of tax disputes under the Framework is steered by a third party known as the facilitator who is neutral, fair, independent and professional. Though the Framework relates to ADR in general, the mode of dispute resolution adopted by KRA in resolving tax disputes is mediation.
Dispute resolution under the framework has advantages like timely conclusion of tax disputes since section 55 (1) of the Tax Procedures Act requires resolution to be within ninety days. It is also cost effective as there is no requirement for filing fees and, a taxpayer has the option of representing themselves to reduce the cost of hiring an advocate or tax representative.
There have also been major gains resulting from the revenue collected and the number of taxpayers who have opted to resolve tax disputes through this mechanism. For instance, 6.6 billion Kenya Shillings from a 35 billion Kenya Shillings locked in tax disputes, was collected within the first two years of implementing the Framework. This was after 140 disputes pending before the Tax Appeals Tribunal, were resolved through ADR. In addition, there was an increase of 109% in the number of cases and a revenue growth of 389% in the 2020/2021 financial year. Finally, in the financial year 2020/2021, KRA collected over 31.5 billion Kenya Shillings from resolving 552 disputes using this mechanism.
The tax ADR structure is deemed to be transparent and independent from the KRA departments that the disputes have originated from. The tax ADR process is also centered on the parties since they have control over the negotiations, while the facilitator only aids them in deciding the settlement terms acceptable to both of them. However, there are still doubts on whether the tax ADR process is indeed mediation strictly so called. For instance, the scope of ADR is limited because the process is internal. In addition, there is no level playing ground for the parties since the facilitator is appointed by KRA. This deviates from the core principle of mediation that requires it to be facilitated by an independent and impartial third party. Therefore, taxpayers may be discouraged from exploring ADR under the Framework due to the fear of there being perceived bias, despite the benefits.
In a study carried out by Ndegwa Mucheru in 2019, taxpayers thought that having an external mediator would have yielded a better outcome. This is because of disputants’ perception that an internal mediator cannot completely maintain neutrality. Though having internal mediators is less costly than having external mediators, the perception of lack of partiality affects the integrity of the process regardless of the internal mediator’s integrity. Disputants struggle to recognize impartiality if they feel their grievance is not being given the consideration it deserves. On the other hand, external mediators are preferred by taxpayers because of the perception that they are independent hence will be impartial throughout the process.
What Next?
To reflect the true principles of alternative dispute mechanism, the Framework should be amended and the resultant ADR practice reviewed; so that more taxpayers can embrace ADR as a mode of resolving tax disputes.
It is necessary to include a provision that allows the parties to select an external facilitator not affiliated to KRA, where they wish to do so. Public sensitization on ADR and the Framework is also needed, to provide taxpayers with an understanding of the process and their rights so that they are better equipped to participate and benefit from the process.
Further, KRA can adopt United Kingdom’s approach of training facilitators and issuing them with a certification in order to regulate their conduct so that instances of bias and unfairness can be avoided. This would address the concern by taxpayers’ regarding the internal mediator’s independence thereby preserving the integrity of the process. Finally, the Framework can be amended to include a provision requiring the existence of a mutual agreement between the parties on whether or not to engage a facilitator for ADR, as was the case in South Africa. This would go a long way in ensuring that the parties feel like they have control over the process. These changes are essential in improving the ever-evolving alternative dispute resolution practice.
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