Tax ADR agreements implications

Introduction

Alternative Dispute Resolution (ADR) has become an integral part of tax enforcement procedures, providing taxpayers and tax authorities globally with a flexible and efficient mechanism for resolving disputes. ADR agreements, once entered into by the parties involved, are generally binding and enforceable. However, the case of Rongai Tiles & Sanitary Wares Limited v Commissioner of Domestic Taxes raises the question of whether the Kenya Revenue Authority (KRA) can depart from an ADR agreement. This article delves into the legal arguments and principles surrounding this issue.

Link to the whole case HERE

Overview of the Case

The Rongai Tiles case centered around a taxpayer's appeal to the high court challenging the Kenya Revenue Authority's (KRA) assessment of its tax liability. In the earlier stages of the legal proceedings, the tax appeal tribunal proposed that the parties consider utilizing the Alternative Dispute Resolution (ADR) framework offered by the revenue authority to find a resolution to the dispute. As a result, the parties agreed to engage in ADR and reached an agreement that partially reduced the taxpayer's tax liability.

However, despite the agreement reached through ADR, the KRA later expressed reluctance to formalize the consent for adoption in court. Consequently, the taxpayer was compelled to file an application seeking enforcement of the ADR agreement, in order to ensure its implementation.

Enforceability of ADR Agreements

ADR agreements, including those entered into in tax proceedings, are generally enforceable unless valid grounds for departure can be established. The court's role is to give effect to such agreements, as long as they have been freely negotiated and are not tainted by elements such as fraud, coercion, undue influence, mistake, or misrepresentation. The burden of proof lies with the party seeking to depart from the agreement.

Arguments Presented by KRA

The Kenya Revenue Authority presented several arguments against the enforcement of the ADR agreement. Firstly, it emphasized its role as the revenue collection agency and contended that the issues raised in the appeal were of public interest and policy nature, and therefore, should be determined by the court. KRA maintained that the ADR agreement was peripheral to the appeal and did not constitute a waiver of its rights to seek a judgment based on the merits of the case. Additionally, KRA claimed that its representative lacked access to crucial material facts when entering into the agreement, likening it to a contract formed under misrepresentation.

Taxpayer's Counter Arguments

In contrast, Rongai Tiles presented compelling counter arguments, asserting that the ADR agreement should be enforced. The taxpayer placed emphasis on the fact that KRA had not presented any valid justifications for departing from the agreement. Rongai Tiles relied on the provisions outlined within the ADR agreement itself, as well as legal precedents that uphold the enforceability and binding nature of ADR agreements. The taxpayer argued that KRA had failed to provide evidence of fraud, misrepresentation, or undue influence, which are necessary grounds for setting aside the agreement.

The court's decision in the Rongai Tiles case has significant implications regarding the enforceability of ADR agreements between KRA and taxpayers. It reaffirms the importance of ADR in tax proceedings and emphasizes the obligation of parties to adhere to the terms of such agreements, unless compelling reasons for deviation are demonstrated. The case establishes a precedent for future disputes involving ADR agreements with the KRA and reinforces the principle of honoring agreements that are freely negotiated.

The ruling also underscores the court's commitment to promoting ADR as a valuable mechanism for fair and efficient resolution of tax disputes. By endorsing the enforceability of the ADR agreement in this case, the court encourages parties to explore alternative avenues for resolving conflicts and reduces the burden on the court system.