Navigating Post Clearance Audits by KRA: A Guide for Taxpayers Importing into Kenya

Timelines and Key Focus Areas by the KRA during Post Clearance Audits
Customs legislation allows the KRA to conduct post clearance audits on records going back up to five years unless fraudulent activities by the taxpayers are detected, which would necessitate extension of the five-year period.

During customs audits, the KRA mainly focuses on ascertaining the correctness of declarations regarding tariff classification, method(s) applied in computing customs values, origin of the goods, warehousing compliance, correct use of duty exemptions or relief programs, and authenticity of documentation.

Customs legislation gives the 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 records, stock records, sales and purchases journals, general ledgers and bank statements to prove payment of duties.

Generally, 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 Taxpayers Should Conduct Themselves Prior, During and After the Custom Audits

Preparation for post clearance audits is important. Prior to the commencement of the audit, it is advisable that the taxpayer collates all the information requested by the KRA and have it organised systematically, ensuring 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 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, the taxpayer should 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 should also keep a trail of all correspondence with the KRA, as this information shall be critical if 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 and 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 lump sum 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.

Conclusion
With 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 before importations. By achieving these best practices, importers can not only survive the post clearance audits but thrive through them.

Should you have any questions regarding the information in this legal alert, please do not hesitate to contact Daniel Ngumy or Priscilla Githinji.