A Battle Royale Over “Perpetual VAT Credit” for lawyers

In what seems like a legal episode of a blockbuster drama, the Kenya Revenue Authority (KRA) has cranked up its feud with lawyers, accusing some law firms of turning tax declaration into an art form, ultimately shortchanging the State.

According to the KRA, these legal masterminds have been quietly dancing around their tax responsibilities by playing hide-and-seek with withholding tax credits. It’s a high-stakes game where interest income sits center stage, attracting a 15 percent withholding tax. Banks dutifully snatch this tax from law firms’ accounts, shuffle it to the KRA, and simultaneously credit the law firm’s iTax account. All fine and dandy until someone notices a tax tango going on without a declaration of the interest income.

Commissioner for Domestic Taxes, Rispah Simiyu, unveiled the grand revelation, stating that some law firms have been on a perpetual VAT credit joyride. This prompted the taxman to don his auditor’s hat and start digging into the VAT credit in their iTax accounts.

Simiyu pointed fingers, stating, “Some of the law firms have, therefore, been claiming the withholding tax credits against their tax liabilities (thereby reducing their tax liability) but without the corresponding declaration of the interest income.”

Unsurprisingly, the legal eagles, led by the Law Society of Kenya (LSK), are squawking in protest, branding the KRA’s tax assessments as arbitrary. In one corner, the KRA is demanding five years’ worth of tax details from a law firm, and in the other corner, LSK president Eric Theuri is crying foul, suggesting the system needs a serious makeover.

Theuri threw shade on the existing setup, expressing frustration that there’s no way for law firms to gracefully transfer a tax credit to their clients. “What other people are doing is that they are paying over and above the credits that have been utilized,” he exclaimed, shedding light on the mysterious realm of extra credits. Instead of the KRA acknowledging this surplus, they are apparently channeling their inner Sherlock Holmes and accusing the advocates of hidden riches and tax evasion. Elementary, my dear Theuri.

In response, Simiyu defended the taxman’s assessments, claiming they were merely a quest to recover underpaid taxes from law firms that failed to provide evidence of interest income trickling down from client account deposits.

This legal tug-of-war has driven the LSK to rally its troops. Florence Muturi, the CEO of LSK, issued a battle cry, urging the over 20,000 members feeling besieged by the taxman to officially complain. The message is clear: the LSK is not amused by what they view as the KRA’s arbitrary tax assessments and a blatant disregard for due process.

For lawyers, already grappling with the unanticipated role of being reporting agents in the battle against dirty cash, this tax turmoil adds insult to injury. A move they initially resisted, citing the violation of “advocate-client privilege,” has now become a double-edged sword.

As President William Ruto’s government strives to appease the International Monetary Fund (IMF) by reducing the country’s debt vulnerabilities, lawyers find themselves in the crosshairs as one of the groups accused of not pulling their weight in the tax contribution arena. It’s a legal saga that promises more plot twists as the taxman tightens the screws and lawyers gear up for a battle of wits in the courtroom and the tax office alike.