BY CPM
Technology advancement and innovation: iTax, E-auditing and data analytics
One of the greatest innovations that has happened in the tax space and which has affected tax practitioners, venue authorities and taxpayers is the introduction of iTax. This has been revolutionary. iTax is the online platform through which the Kenya Revenue Authority (KRA) is engaging tax payers and tax practitioners in terms of receiving information and tax documentation. The nature of its instructiveness will soon make it very difficult for taxpayers to escape the tax net. With this, KRA can quickly process tax returns; determine who is not paying tax and effectively track transactions. KRA can pick up fraudulent input VAT claims through crosschecking and cross matching data submitted by taxpayers. Expect a stronger KRA in 2016 onwards in terms of getting people into the tax net. Coupled with measures that the government is implementing, like eCitizen, tax compliance will become almost automatic.
In the field of auditing, as a response to complexity of operations, the industry is moving from checking boxes and manual paper shuffling. Auditors are embracing paperless audits; E-audit. Most of the big four firms including KPMG, PWC, Deloitte and Ernst & Young have come up with E-audit platforms that make it easier for them to audit their clients. It is clear that smaller firms are adopting this too.
Data analytics is the other area that is set to change the way professionals approach their work whether in tax, audit or the various shades of advisory. For auditors, data analytics has the benefit of offering greater situational awareness and predictive indicators of an organization’s internal and external environment. Big Data, as its exploitation rises, will offer professionals better tracking options, analysis and understanding of risks depending on industry, geography, size and other factors. With this, the possibility for better solutions and efficiency is great.
European Union Audit Reform
This is the regulation of the auditor in terms of how long they can carry out the audit of a specific entity. There has been no limit. You could audit a client indefinitely. This was however checked by the industry practice of partner rotations. The EU reform brings significant change for businesses and their professional service providers, and will impact all EU public interest entities, regardless of where in the world they may be headquartered. With the new rules set to come into effect in EU Member States from June 17 2016, this will have a significant impact in Kenya and in the region especially for local companies whose head offices are located in the EU
The new rules brought about by the EU audit legislation cover several areas, from mandatory audit firm rotation to restrictions on the traditional services that can be provided to a business by their statutory audit firm. With rotations however, opportunities will arise for all firms as it is already happening in Europe.
Tax transparency and accountability
Taxpayers always do what they can to minimize their tax incidents. Tax evasion (avoiding tax by illegal means) is illegal and criminal. Tax avoidance on the other hand (use of legal means to avoid taxation) is not. Increasingly, revenue authorities are getting tough on both of these actions.
Instituted over 2 years ago, Base Erosion and Profit Shifting (BEPS) Project is an ambitious global project by the G20 countries. This project intends to eliminate reduction of taxes through base erosion and shifting of profits from one tax jurisdiction to another. It is a 15-point Action Plan that addresses specific areas within the operations of (Multinational Corporations) MNCs. Specifically, the plan is aimed at reducing instances of tax evasion.
The implementation of BEPS Project started in January 2016 and practitioners have a huge opportunity to help MNCs comply with BEPS requirements, explicitly on Transfer Pricing. In fact, there already is increased interest in Transfer Pricing from KRA on the transactions of MNCs to reduce erosion of profits from corporations operating in Kenya. We are likely to see increased Revenue Authority audits focusing on Transfer pricing.
The G20 focus on global BEPS will have great impact on the activities of MNCs in Kenya, regionally and globally as countries adopt Master File, Local File and Country-by-Country (CbC) reporting. East African countries have already put plans for domestication of legislature and subsequent implementation.
The debate on BEPS Project should dominate the industry in the next 5 years.
Tighter Tax Legislation and increased regulation
Yearly, there are proposals on how to improve the tax environment. They are presented as progressive sealing of loopholes in tax legislation. Traditionally, this is done through annual budget reading and amendments to the Revenue Act or Finance Act. For instance Capital Gains Tax in Kenya was re-introduced in 2015, but uncertainties in its implementation will most likely see to its improvement, just as the new vehicular tax.
Alongside this, the government through various authorities and professional bodies is coming up with sectorial regulations. For example, Central Bank of Kenya (CBK) now requires auditors to carry out audits on the technology used by banks (IT audits) and issue independent report findings that are separate from the audited financial statements report.
Institute of Certified Public Accountants (ICPAK) will tighten regulations of practice, vetting of professional firms and individuals and so on.
Devolution
There has been a lot of concentration in Nairobi for the big four firms. With devolution picking up, expect to see these firms engaging county governments, which will need the input of tax experts and other service industry people in strategy formulation, infrastructure development, proper utilization and distribution of resources. Right now county government operations are at their infancy, but in the years to come, starting with this one, as they upscale, the service industry people will have to work with them.
I see a situation where budgetary pressures and competing interests will most likely force county governments to transform their financial management to align more to corporate culture. This will require significant training and up scaling of county government resources. Professional firms will lead this initiative.
Other changes to expect include;
Competition: As the economy expands, big consulting firms will get into the regional and Kenyan market leading to a competitive environment. Also, do not count out the small and medium tier audit and advisory firms, which we already have evidence as showing their rapid growth.
Medium sized and family owned businesses: Professional services are currently limited in family owned businesses. Yet medium sized and family owned businesses is a rapidly growing sector (According to KPMG and Business Dadilyctop 100 Survey findings) and as they grow, they will need services that can only be offered by personal services firms. There will be increased demand for advisory services from this sector as it expands.
Pursuit of greater specialization: The pursuit of specialized knowledge is rising in audit, tax and advisory. Firms will be looking for consultants with very specific knowledge and skill set targeted at particular industries. Not general practitioners.
The reality is that the demand for professional services and specialist skills in the country is rising rapidly. As the regulatory environment gets more complex, professional services will be demanded even more.
