Post clearance audits: A guide for taxpayers importing into Kenya

The Kenya Revenue Authority (KRA) has recently been aggressive in conducting post clearance audits, essentially reviewing import transactions and records after goods have already been cleared and released from customs control.

The KRA employs post clearance audits as a vital tool to ensure compliance with the customs legislation by taxpayers. Other reasons for conducting post clearance audits include protecting tax revenues by identifying leakages as well as maintaining a level playing field for all the importers.

Timelines and key focus areas during post clearance audits

Customs legislation only allows KRA to conduct post clearance audits on records going back up to five years unless fraudulent activities by taxpayers are detected, which would necessitate extension of the five-year period.

During audits, the KRA mainly focuses on ascertaining correctness in declarations pertaining to tariff classification of the goods, method(s) applied in computation of custom values, origin of the goods, warehousing compliance, correct use of duty exemptions or relief programmes as well as authenticity of documentation.

Customs legislation gives KRA, leeway to request production of all documents/ records from the importer or person who may be in possession of the documents.

Generally, the key documents requested during the post clearance audits include import entries and attendant documentation, VAT and stock records, sales and purchases journals, general ledgers and bank statements to prove payment of duties.

The burden of proof in tax matters lies with the taxpayer and therefore it is imperative that the taxpayer provides the requested documentation by the KRA.

How should taxpayers conduct themselves prior, during and after the custom audits?

Preparation for post clearance audits is important. Prior to commencement of the audit, it is advisable that the taxpayer collates all the information requested and have it organised in a systematic manner as this will ensure the audit process is carried out efficiently.

During the preparation stage it is also important that the taxpayer carries out a self-review of the customs declarations to identify any potential discrepancies or areas of concern. This pre-emptive step allows the taxpayer to identify any tax exposure before the issues become problematic during the audit process.

During the post clearance audit, it is important for the taxpayer to have a designated knowledgeable staff who understands the customs processes and procedures. This will ensure that all correspondences with the KRA are handled professionally and efficiently.

The taxpayer also needs to ensure that they keep a trail of all correspondences with the KRA as this information shall be critical in the event that the audit spans into a full-blown tax dispute in later stages.

At this stage and bearing in mind that the burden of proof in tax matters rests with the taxpayer, it is critical that the taxpayer fully cooperates with the KRA and submits all the requested documents.

After the audit, it is critical for the taxpayers to review the audit findings issued by the KRA as well as substantively respond to the findings. The response to the audit findings will be guided by whether the taxpayer agrees or disputes the findings.

Where the taxpayer agrees to the audit findings, they can consider settling the tax liabilities demanded. Settlement can be in a lumpsum or by way of instalment payments as may be agreed with the KRA.

However, where the taxpayer disagrees with the audit findings they should consider working with a tax professional to prepare substantive audit responses.

As a final point at this stage, the taxpayer should consider taking the insights gained from the audit to improve compliance going forward to prevent future non-compliance.

With the KRA’s heightened focus on post clearance audits, it is crucial for importers to have in place robust compliance measures to avert tax demands during the post- clearance audits.

Some of the best practices to achieve this will include: keeping comprehensive records, regular internal/self-reviews, engaging with licensed clearing agents and seeking advance rulings from the KRA prior to importations. By achieving these best practices, importers can not only survive the post clearance audits but thrive through them.

The writers are tax lawyers at Anjarwalla and Khanna LLP.