It takes two to tango; it’s so true in business. Every transaction involves two parties. Every seller must have a buyer, every employee must have an employer, and every service provider must have a service recipient.
Therefore, for every transaction, there must be an equal and opposite effect. One party’s income must be an expense for the other.
This basic fact is useful to tax collectors, information from one party is enough to trace the other. Tax systems are designed in such a way that taxpayers involuntarily declare themselves to each other.
We must assume that not all taxpayers have the motivation to evade taxes.
If the government itself pays a lot of taxes, other taxpayers will voluntarily or otherwise pay their taxes.
When paying taxes, certain deductions are allowed, which are to the benefit of the taxpayer. This is when the counterparties are trained.
A tax deduction for one party is the taxable income of another. When claiming an expense, details of the other party with income must appear.
The automated VAT audit is designed on this premise. The tax charged by the seller to the buyer is deductible by the buyer, however, the buyer cannot claim this tax until the seller has already remitted this tax.
The buyer remains bound to the seller, which means that the buyer cannot accept false invoices, again he must push the seller to comply.
A much improved version of the automated VAT audit is in preparation. The Tax Invoice Management System (TIMS), which will be launched on August 1, 2022, is designed to ensure instant filing of VAT returns.
All seller and buyer information will be received at once.
For income subject to withholding tax, the payer and the beneficiary remain linked to each other.
The party making the payment must quote the beneficiary’s PIN which generates information in the records of both parties.
The paying party will claim these payments to reduce the tax payable. Expenses subject to withholding tax are not permitted if tax has not been withheld. Failure to withhold additional tax at source is an offence.
The payer has no reason not to withhold tax, in doing so the beneficiary of the income is revealed.
Another case of two related parties is between employers and employees. Employers must remit payroll monthly and employees report the same in the year-end statement.
Employees can now file reports on pre-populated forms, which means they can already find payroll information collected from employers in their records.
This is an idea that needs to be replicated in other statements.
There is no point in giving the tax authorities information they already have.
Information already received by the Kenya Revenue Authority (KRA) from counterparties should be pre-filled in the tax return forms.
Information collected from VAT and withholding tax should be locked into taxpayer reporting forms.
This not only reduces the risk of tax evasion, but also makes tax filing easier.