More scrutiny as State hires expert to net tax cheats

NAIROBI, KENYA; Taxpayers could be in for a rude shock as the Government moves to conduct a thorough scrutiny of their earnings with the aim of widening the tax bracket.

The move comes at a time when county governments are facing increased pressure from the State to up their game in revenue collection.

Increased revenue collection is meant to help cut the country’s budget deficit in the wake of piling debts.

With support from the World Bank, the National Government has hired a consultant - Adam Smith International (ASI) - to study the potential of all the 47 counties’ revenue collection targets.

This is in line with the proposed National Policy to Support Enhancement of County Governments’ Own-Source Revenue (OSR). In what could be the death knell for tax cheats, the Government wants Adam Smith to estimate the scale of revenue leaks due to non-compliance.

The consultant will also assess the tax revenue potential, pointing to a possibility of looming new taxes in the counties.

The study was officially inaugurated on March 20 by the National Treasury Principal Secretary Kamau Thugge.

“The goal of the study is to improve understanding of how much revenue counties are collecting in relation to their tax gap and the potential of future revenues from assigned taxes assuming maximum fiscal effort,” said Dr Thugge.

The Adam Smith International team is made up of six experienced figures led by Ian Nelson as the project manager.

Also in the team is Nick Spyropoulos, an international tax economist and forecasting expert, and Graeme Keay who is an international tax legislative expert. Desmond Boi, a Kenyan statistician as well as Johannes Wolf, an economist are also part of the team.

It will comb through the counties’ books, with a view to collecting more information. The team will, for instance, want to know the number of registered vehicles per county, those owned by county residents and the number of parking spaces. They will concentrate on an array of areas, including property taxes, cess, entertainment taxes, vehicle parking fees and liquor licensing fees. The consultant has been tasked with developing a framework to monitor OSR improvement across the counties - at a time when counties are highly reliant on the National Government.

According to the County Revenue Baseline Study of 2015, while there are 150 different sources of tax revenues counties have concentrated on about 10 only.

Business permits

Leading sources include vehicle parking, land rates, business permits, approval of buildings, market fees, public health and medical levies, signboard fees, rents and cess.

But the experts want to help the Government to cast the net wider to reduce reliance on traditional sources. “We will examine revenue streams which may not be important across counties but are leading sources of revenues within each county, in order to ensure that we assess all streams with significant potential revenues for all the counties,” said ASI. Already, the consultant has held meetings with National Treasury, Kenya Revenue Authority (KRA), Kenya National Bureau of Statistics (KNBS), Ministry of Lands, Controller of Budget, and Commission on Revenue Allocation officials.

“Tax gap studies can be controversial, especially if their results affect revenue collections. As such, central to our stakeholder engagement strategy is a policy of openness and transparency,” said the consultant

The National Treasury has been meeting with, among other officials, the county finance committee members and chief officers to prepare them for the study that seeks to uncover all tax gaps in their jurisdictions.

The consultant, who in August 2015 conducted almost a similar work in Sierra Leone, has already prepared an inception report based on initial assessment and preliminary engagement with the study’s advisory group.

For instance, on April 20, National Treasury met officials from Nairobi, Kajiado, Machakos and Kiambu counties at the Kenyatta International Convention Centre (KICC), Nairobi to discuss the inception report, enlighten them on the study’s context and objectives as well as agree on study period and work schedule.

In addition, Treasury wanted to assess the available information and the additional data requirements for the study.

Officials were also required to discuss with Treasury the methodological framework for county revenue potential estimation and econometric tax compliance modelling. The meeting also explored the legal and policy framework of respective counties’ administrative capabilities.

According to Dr Thugge, the key objectives of the Adam Smith International team will be to map out each county’s current local revenue base as well as find out the associated potential.

They will also be expected to generate a systematic identification of revenue streams to help maximise collections by each county.

The consultant will also be expected to help “bring about more credible projections by counties of future revenue from assigned taxes, fees, levies and charges - leading to improved alignment between budgets and policy priorities.”

In the 2016/2017 financial year, the fiscal deficit hit 8.8 per cent of gross domestic product (GDP) due to domestic revenue shortfalls and spending pressure related to drought and elections.

But with pressure from organisations such as International Monetary Fund, Kenya has committed to finding ways of broadening its tax base and strengthening revenue performance in counties.

According to ASI, an initial expansion of revenues that continued after devolution seems to be slowing down or even reversing.

OSR contributes only up to 12-13 per cent of the total financing of county government, with increasing dependency on transfers from the National Government.

“This has raised concerns that OSRs are not commensurate with the scale, growth and nature of expanding economic activity at the county level and with the expanding value of the tax/fee base,” notes Adam Smith consultants.

The National Government is desperate to correct this by broadening the revenue base and seal tax leakages. It hopes to achieve this through a new policy, County Revenue Bill (2018) which is still in draft form.

In some cases, the Government plans to invest in the administration of OSR through infrastructure, equipment or staff to ensure transparency. The consultant notes that the government wants to, first of all, understand revenue potential to know where to put such investments.

And at the third and final phase of the study, ASI will be required to simulate the revenue potential for each county.

The firm will also review the constitutional and legal powers of counties in raising revenue as well as the discretion to introduce taxes, fees, charges and levies as well as the setting of rates and tax boundaries or grant reliefs.

National Treasury hopes to receive specific recommendations on how different counties should strategise to enhance revenue collection based on their unique macroeconomic, fiscal, geographic and urban profiles.

So far, the consultant has collected tentative fiscal data and list of OSR for each county to help in estimating revenue potential.

ASI wants to collect more detailed information on revenue streams such as the number of taxpayers and service users.

The team has gathered information on revenue bases such as land size, property rates and business licenses.

County governments have continually put up adverts, removing penalties on land rates to incentivise defaulters to pay. This could end soon.

For a start, according to their schedule, May 4 was the last day to gather data from key agencies such as KRA.

The Adam Smith team has gathered KNBS data on number and size of hotels and restaurants across counties, the population of counties, license payments from counties among other information.

From KRA, it has combed through memorandums of understandings (MoUs) signed between the taxman and counties to collect taxes and compared with actual taxes collected under those MoUs.

Registered businesses

KRA has also given them information about the number, size and nature of registered businesses across the counties.

Going by ASI targets, the Ministry of Lands has given the data on the average land and property value per county and dates they were valued, the number of plots per county and whether residential or commercial.

The ministry also gave out the land rates for each county.

ASI’s preliminary observations are that there exist data gaps due to major inconsistencies - from older templates used by counties to report their local revenues to the controller of budget. “While new taxes and fees policies have been introduced for all counties, the template for revenue documentation has not been revised,” notes ASI.

As a result, the breakdown of actual revenue collection by types and taxes and fees are not properly reflected in county reports send to the controller of budget. ASI notes that contradictions even exist between reports produced by Controller of Budget and Auditor General.

Counties will also be under pressure to improve on their data collection, given that experts say a number of vehicle licenses are not recorded.

This means devolved units don’t even know the potential of revenue from car parking.