The Kenya Revenue Authority (KRA) is set to lock horns with Kenyan lawyers. This us after it started making audit demands to lawyers as it goes for their bank accounts in search of withholding tax.
According to a report that appeared in a local daily, the taxman has already sent an audit demand to a local law firm for the five year period starting in 2018.
In correspondence to this law firm, the KRA claims that the law firm has been on perpetual value added tax (VAT) credit since 2018. As a result, they have paid more in taxes and currently have no tax obligation.
“We wish to carry out a verification of your VAT credits as reported in your i-Tax declarations for periods January 2018 to date,” the KRA said in the letter to the law firm.
“We wish to advise that this verification is limited to the area specified above, KRA reserves the right for further verification and/or audit when new information becomes available.”
In the verification audit, the KRA is demanding for purchase invoices, sales invoices, bank statements and monthly Electronic Tax Register (ETR) reports.
Its claims are that law firms in the country have been avoiding taxes. However, the Law Society of Kenya (LSK) had contested this and claimed that the KRA is on another round if tax harassment.
The LSK says that an advocate in the country tends to keeps two accounts: one for the firm’s earnings and the other for holding the client’s cash.
This client’s money is then invested in an account that earns interest. The interest earned is given to the client.
“What is happening is the KRA goes into the client’s account, it checks how much an advocate has had and invested on behalf of the client and takes that interest that has been generated as the income for the advocate,” LSK boss Eric Theuri said.
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However, the KRA is claiming that this interest that’s earned for the client is income for the lawyer. As a result, the KRA is slapping a 15 per cent withholding tax on the money if in a fixed deposit account, even though lawyers argued that the interest earned is owned by their client.
“The Council of the Law Society of Kenya is extremely concerned about the rising number of cases and complaints by the public, especially by Advocates, against the KRA in relation to arbitrary tax assessments and the failure by KRA to follow due process or laid down procedures under relevant tax laws in the execution of their mandate,” Florence Muturi, the LSK chief executive officer said in a notice to all 20,000 LSK members.
“The complaints include auditing and freezing of privileged trust and client accounts, unreasonable demands for confidential and privileged documents and information.”
The LSK has asked its members to record and lodge complaints in a bid to fight back against the move by the KRA.
“This will enable us to formally lodge a complaint with the KRA and also formulate appropriate responses to this affront,” said Ms. Muturi.
