Will amnesty plan help Kenya eradicate tax evasion menace?

In his 2017/18 Budget statement, Treasury secretary Henry Rotich said Kenyans who had stashed wealth abroad had an additional six months ending June 30, 2018 to enjoy the tax amnesty introduced by the Finance Act 2016.

The amnesty procedures now require interested taxpayers to file their returns declaring such income and repatriate it to Kenya.

The regulations published after the tax amnesty were unclear on certain conditions that were not included in the Finance Act, necessitating amendments in Finance Act 2017.

The amendments dictate upon all interested persons to repatriate all declared foreign-held funds to Kenya, immediately or within a five-year period subject to a penalty of 10 per cent. The move seeks to enclave into the tax basket all foreign-earned income from qualifying Kenyan residents.

The tax amnesty on foreign-sourced incomes is also a measure towards countering the effect of Base Erosion and Profit Shifting (BEPS) in Kenya.

The BEPS refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations. More than 100 countries and jurisdictions are collaborating to implement BEPS measures and tackle tax avoidance.

Kenya has agreed to participate in the Common Reporting Standards regime, which is a global initiative developed by the Organisation for Economic Co-operation and Development to enhance tax transparency and compliance across more than 47 countries.

Has this tax amnesty been effective? Was it a ploy to launder funds to oil our politicians’ election machinery? Will this fiscal move stimulate foreign direct investments? Are there any further regulatory interventions required before the June 2018 deadline?

The recent Paradise Papers leak should serve as an important acid test to the ongoing tax amnesty. It refers to a published database containing information on offshore entities linked to people and companies in more than 200 countries and territories.

READ: Kenya 'loses over Sh600bn to tax evasion annually'

The real value of the database is that it strips away the secrecy that cloaks companies and trusts incorporated in tax havens and exposes the people behind them. This includes the names of the real owners of those opaque structures.

The publisher, International Consortium of Investigative Journalists (ICIJ), released the details on November 5 of some politicians featured in the Paradise Papers investigation.

According to the ICIJ, the database neither discloses the totality of the leaked records nor divulges raw documents or personal information en masse. It contains a great deal of information about company owners, proxies and intermediaries in secrecy jurisdictions, without disclosing bank accounts, email exchanges and financial transactions contained in the documents.

The ICIJ insists that its actions are in public interest and acknowledges that most activities carried out through offshore entities are perfectly legal.

Contrarily, the ICIJ affirms that from its extensive reporting together with its media partners in the last four years, the anonymity granted by the offshore economy facilitates money laundering, tax evasion, fraud and other crimes.

Surprisingly, the only Kenyan so far identified in the leaks is a former minister in the Grand Coalition Government.

Is it believable that even the Asian tigers in Kenya, top rich families and the entire list of Who is Who are missing on this list? Was the tax amnesty a timely opportunity for Kenyans hiding their treasures offshore to divest? The answers to these and more questions may lie in the unravelling leaks.

On a different note, the impact on this tax amnesty from some extraneous and legal factors needs to be assessed.

For instance, it is important to consider whether the existing anti-money laundering laws, the law on economic crimes, law on asset transfer and anti-double taxation laws may impede on the objects of the tax amnesty regulations.

The general purpose of most tax amnesties is to nab evasive taxpayers who may wish to change to turn to tax compliance. Tax authorities maintain taxpayers’ information obtained during the amnesties and follow up on their compliance in future.

However, the new tax amnesty regulations bar the Kenya Revenue Authority (KRA) from making enquiries on the sources and nature of such income hence limiting its usefulness for posterity.

This paves the way for repatriation of illicit funds and other money laundering activities. Whereas the amnesty regulations do not exonerate taxpayers of any criminal liability, the KRA has reiterated that all information declared under the amnesty will be confidential and not divulged to other State agencies.

It should be of interest to taxpayers whether the existing anti-money laundering laws are consistent with the amnesty regulations in ensuring immunity.

The amnesty regulations may also seem unrealistic in the requirement for repatriation of all declared funds and assets. The period provided for repatriation may discourage owners of foreign-held illiquid assets, especially in real estate.

Furthermore, in the event of assets held in foreign trusts by Kenyan tax residents — which are often bound by the laws of the specific jurisdiction they were formed in — may not be easily repatriated.

Even more equivocal is the case of an irrevocable discretionary trust. A Kenyan taxpayer may lack a fixed interest hence unable to repatriate the trust assets.

It is paramount that the KRA provides regular updates on the uptake of the amnesty by taxpayers. The amount of foreign funds injected into the economy should be quantified and published. It will also be hard to fight the negative perception surrounding the secrecy of repatriated funds and assets.

Njeru is a tax analyst, Rödl & Partner Okumu is a tax manager, Rödl & Partner.