The Risks of Conducting Business With Incomplete Records

For fairly obvious reasons, regulators are often afforded wider latitude than the individuals and entities they regulate, when disputes arise.

This imbalance is particularly pronounced  in tax matters, where most jurisdictions in the world adhere to the principle that a taxpayer bears the burden to prove that an assessment by a tax authority is excessive and/or illegal. In other words, assessments raised by a lawful authority are presumed to be correct unless rebutted by evidence from the affected taxpayer.

Where the Risk Hits Hardest

This reality is felt mostly in the informal sector and among small and medium enterprises (SMEs), where accounting and record keeping systems are usually less formal. Yet when disputes arise, these practical constraints offer little protection, leaving businesses vulnerable to adverse assessments that are difficult and costly to challenge.

Cautionary Tale from Uganda

A recent case in Uganda illustrates this risk clearly. In Katonga Farms Limited V URA  (2025), an entity operating within a group structure, had, over a period of two decades, borrowed funds from its related entities and reflected those amounts as loans in its balance sheet. During a tax audit conducted in 2023, the tax body (URA) required the entity to produce documentary evidence, dating back to the time the funds were first advanced, to prove that the amounts constituted genuine loans. The gaps in the available documentation led to a tax assessment which was subsequently referred to the Tax Appeals Tribunal for determination of its legality.

Fortunately, for Katonga Farms Limited, the Tribunal held that the Income Tax Act prescribes a statutory five-year limit for the retention of documents for tax purposes, and it was therefore unreasonable to expect the entity to produce documentation beyond that period, particularly because the loans were non-interest bearing. While this statutory limit operated in Katonga’s favor, the decision serves a reminder that reliance on record retention limits is no substitute for maintaining complete and accurate documentation.

A Harsher Reality Elsewhere

In other jurisdictions in the East African region, the Courts have adopted a stricter approach. In Kenya, for example, the Courts have found that any unexplained credits on a taxpayer’s bank statements can be treated as undisclosed incomes and subjected to tax where the taxpayer does not have evidence to prove the source and nature of the funds. This principle was discussed in the cases of Virginia Wangari Ng’ang’a V. Commissioner Legal Services and Kirin Pipes Limited V Commissioner of Domestic Taxes.

Similarly, in Tanzania, in the decision of Williamson Diamonds Limited v Commissioner General of the Tanzania Revenue Authority, the Court reaffirmed the principle that the evidential burden rests on the taxpayer and that unsupported claims are insufficient to displace a tax assessment.

Takeaway

These decisions underscore a consistent judicial approach across the region. Once a tax assessment is raised, the evidential burden rests firmly with the taxpayer, and the Courts will rarely intervene where documentation is incomplete or transactions are unsupported. Informal transactions, unexplained credits, and poorly documented intra-group dealings are therefore inherently high-risk. For taxpayers, robust and timely record-keeping is not merely a statutory obligation but a critical safeguard against adverse tax exposure.

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