Chinese motor dealer Foton spared closure in tax row with KRA

The taxman has lifted its suspension of motor dealer Foton East Africa’s bonded warehouse licence, sparing the Chinese firm the pain of closure and saving scores of jobs.

The Kenya Revenue Authority (KRA) on December 14 suspended Foton’s bonded warehouse licence over unpaid taxes, effectively stopping the Chinese firm from importing more vehicle parts for assembly in Kenya.

The KRA had also accused Foton of failing to comply with other tax rules and processes.

“The current licence for bonded warehouse No. 528 (Foton East Africa Ltd) is hereby suspended with immediate effect due to gross violations of customs laws & regulations governing the operation of bonded warehouses,” the taxman said in a letter written by the Commissioner of Customs & Border Control, Julius Musyoki.

Mr Musyoki on Wednesday told the Business Daily that he lifted the suspension on January 12 after an appeal by Foton, which has since resumed normal operations.

The KRA’s action against Foton was the latest in a series that has seen a number of manufacturers face closure in the wake of tax demands.

Keroche Breweries and Mastermind Tobacco are some of the firms that have been handed lifelines by the courts after they were targeted for closure for failing to pay hundreds of millions of shillings in unpaid taxes.

The trend suggests that either businesses are unwilling to pay legitimate taxes or taxation in Kenya has become too burdensome, causing many to seek avoidance.

Foton said in its appeal that the suspension had stopped its operations, even as it promised to have the issues resolved as soon as possible.
“The suspension has halted our operations and we appeal to your office to lift the suspension to enable us plan imports for our assembly plant to resume operations and for continuity of our line business,” Foton’s general manager, George Osewe, wrote to the KRA in a January 6, 2016 letter.

“We, however, write to commit to have the issues raised by your office resolved the soonest possible.”

Had the licence suspension not been lifted, Foton would have probably left Kenya, with the attendant job losses resulting to reduced competition in the new vehicle market.

The KRA said Foton had failed to pay taxes, had removed goods from the customs warehouse without proper approval and was not keeping proper records of vehicle imports.

The tiff with the taxman is the latest in a string of business disputes that has beset the Chinese company, whose ambition is to become one of the largest motor vehicle dealers in the region.

Foton entered the Kenyan market in 2011 through imports of fully built motor vehicles, including trucks, vans, buses and pick-ups.

It then acquired a piece of land in Mlolongo on which it planned to build a Sh1.2 billion assembly plant with a capacity to churn out 10,000 vehicles a year for the local and regional markets.

The quest to set up a local assembly was informed by a tax incentive that exempts imports of completely knocked-down units headed for local assembly plants from the 25 per cent import duty charged on imports of fully built vehicles.

While Foton awaited construction of its assembly plant, it contracted Thika-based Kenya Vehicle Manufacturers (KVM) to assemble its brand of vehicles.

But the two companies fell out in 2014, forcing Foton to start running an assembly operation at its Mlolongo plant on a scale smaller than initially planned.

Foton has also been embroiled in other business disputes, falling out with its landlord and losing large lucrative deals, including in the public sector.

This confluence of challenges has seen Foton scale back its operations, retreating to Mlolongo after losing its tenancy on a building on Mombasa Road that previously housed its showroom and head office.

Foton’s market penetration strategy of lower pricing — the hallmark of Chinese businesses — however appears not to have been enough to win it significant market share in the competitive industry.

“Chinese vehicles are generally competitively priced but that aside, we shall invest heavily in service, parts, and distribution network to gain market share,” Calvin Guo, then Foton’s general manager, told the Business Daily when the firm launched operations in Kenya.

Foton’s business performance in the local market is a stark contrast to the experience of other Chinese multinationals that have bagged large contracts, especially from the government.

The fact that the Chinese government is the significant owner of Foton appears not to help in a market where other Chinese firms have thrived with the backing of Beijing which in some cases has financed projects undertaken by Chinese multinationals.

Not that China has not tried to flex its muscles to help Foton. Then Vice-President Kalonzo Musyoka was the chief guest at the groundbreaking ceremony of Foton’s Mlolongo plant in 2011, giving a stamp of government approval.

A year later, the then Prime Minister, Raila Odinga, was at the same site to launch a new Foton truck in the company of the Communist Party of China officials.

Foton is among the formal dealers facing challenges in a market that on the whole is seeing its best times in recent history.

The new motor vehicle industry set a new sales record last year, moving 19,996 units, according to statistics capturing the performance of firms belonging to the Kenya Motor Industry Association (KMI).

This represented a 13.3 per cent growth compared to the 17,616 units sold in 2014 as dealers with a big presence in the commercial vehicle segment like Simba Corporation and General Motors East Africa (GMEA) benefited the most from the sales boom.