Economy

Flower firms under KRA probe over tax payments

flower

A flower farm in Naivasha. KRA is investigating some flower exporters over a practice known as transfer pricing, which reduces the amount such companies pay in taxes locally. Photo/PHOEBE OKALL

Flower firms are at the centre of an investigation by the Kenya Revenue Authority (KRA) over tax evasion through manipulation of transactions with their overseas partners.

The audit follows concerns by the taxman that despite horticulture being one of Kenya’s top foreign exchange earners, its contribution to revenue has been poor.

“Companies in this sector with significant international transactions have been put under audit.

"Most of the multinationals in this sector have returned consistent tax losses and sometimes very little taxable profits,” said KRA’s senior deputy commissioner for marketing and communications, Kennedy Onyonyi.

Though KRA is still assessing the full extent of the evasion, conservative estimates from the US-based international financial watchdog, Global Financial Integrity (GFI), indicate that losses related to trade and other outflows reached Sh115 billion in the decade to 2010 or Sh11.5 billion annually.

The annual amount is equivalent to 2012-13 expenditure for the Ministry of Youth Affairs or Special Programmes.

KRA has been given a Sh1 trillion target for this financial year to meet state expenditure which expanded by Sh40 billion due to an increase in wages for teachers, doctors and lecturers agreed towards the end of last year after strikes.

READ: Githae puts Kenyans on notice with Sh1 trillion tax demand

In the first quarter of this fiscal year, KRA missed the tax target set by the Treasury by Sh31.7 billion.

Mr Onyonyi said the horticultural firms, mainly based in Naivasha, were employing questionable management and service contracts to siphon off profit from Kenyan operations to foreign-registered entities, a practice known as transfer pricing.

While local companies would be expected to show profit from their huge revenues, they have been recording losses, meaning they are not charged tax.

Following the cash trail has been made difficult by the related foreign companies being registered in tax havens where they pay either minimal or no tax, leaving KRA struggling to raise funds.

Transfer pricing occurs when local companies which should be paying taxes are not adequately compensated for their business functions, leaving entities registered overseas to accrue the profit.

“The focus is to determine whether companies in our tax jurisdiction are adequately compensated for the functions they perform, the risks they assume and the assets they employ,” said Mr Onyonyi.

The GFI report dated December 12, 2012 and titled Illicit Financial Flows From Developing Countries 2001-2010, says trade mispricing was rising in importance in the shift of illicit funds abroad.

Poor countries like Kenya which do not have effective mechanisms to prevent outflows to developed countries were the most at risk.

“Whatever financial regulations may be in place or may be contemplated have not yet had an effect on the continued passage of funds out of poorer countries, through the global shadow financial system, and ultimately into richer western economies,” says the GFI report.

KRA said it had already established that some of the horticultural multinationals operating in Kenya had operations in low-tax jurisdictions popularly known as tax havens.

“These operations are purported to be providing services such as marketing, management and other technical services. The local entities are, therefore, charged huge amounts for these services,” said Mr Onyonyi.

He said the local entities had been unable to adequately demonstrate that the services were offered for the amounts charged and KRA had demanded that they pay the requisite amounts of tax.

In some instances, he said, local firms were invoicing their overseas partners at very low prices by not adding a reasonable mark up.

“These markups are not able to cover the costs of local operations and cannot compensate the local entity for functions performed, risks assumed and assets employed,” said Mr Onyonyi.

KRA is expanding its network of tax information exchange agreements which would enable it to obtain information on the prices paid for goods from Kenya by foreign customers to the related parties operating in low-tax jurisdictions.

“We have finalised a number of agreements with several key jurisdictions and should be able to obtain this information very soon,” said Mr Onyonyi.

For assessment of tax due from the multinational horticulture firms, KRA is now benchmarking using international databases and local companies performing similar functions and whose information is publicly available.

“We have raised significant assessments on major players in this sector. Discussions are going on with several players to resolve the issues and have the appropriate taxes paid,” said Mr Onyonyi.

GFI director Raymond Baker said most of the money was lost through clever accounting with intra-company deals representing 50 to 60 per cent of cross-border trade.

Mr Baker said in earlier report that he had “never known a multinational, multi-billion-dollar, multiproduct corporation that doesn’t use fictitious transfer pricing in some part of its business to shift money in some of its entities.”

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