Markets & Finance

Corporate tax exemptions cost Kenya Sh114bn annually


Kenya Revenue Authority head office at the Times Tower building in Nairobi. PHOTO | FILE

Kenya is losing $1.1 billion (Sh114 billion) annually through tax exemptions to global corporations, a new report by Oxfam shows.

The loss of potential revenues that could support critical sectors such as health, education and roads has had far-reaching implications on inequality between the rich and the poor.

The revelation comes at a time the Treasury says it is strained for finances and is relying on expensive debt to fund development.

The government plans to borrow up to Sh503.1 billion from external lenders this fiscal year besides local debt of Sh241 billion as it looks to plug a budget deficit of Sh689 billion.

The lost funds, according to the UK charity’s report, are nearly double what the government has allocated the health sector in this fiscal year’s budget and a third of the Sh327 billion Nairobi-Mombasa standard gauge railway cash borrowed from China.

For 2016/2017 financial year, the Health ministry has received Sh60.269 billion compared to Sh59 billion in the 2015/2016 budget.

“Tax revenues are critical for funding the policies and services that can fight inequality including infrastructure, health and education…The use of tax havens and loopholes or the securing of preferential tax treatment doesn’t just reduce abstract balance sheets.

“Everyone else is forced to pick up the bill and the human cost is borne by the most vulnerable in society,” reads the report.

Oxfam links tax exemption with increasing poverty levels in Kenya, corroborating past reports on the role tax-dodging multinationals play in condemning millions into abject poverty.

A 2014 UN report said Kenya’s wealth remains concentrated in the hands of a small segment of the population, earning East Africa’s largest economy a place among the world’s most unequal societies.

READ: Kenya losing over Sh600bn in tax evasion annually

According to the Oxfam report published Monday, besides failing to pay their fair share of taxes, multinationals are also complicit in paying low wages that cannot sustain decent livelihoods among Kenyan workers.

“We calculated that Kenyan flower workers’ wages could be doubled if just 5 pence were added to a £4 bunch of roses,” it notes.

Going forward, the KRA has powers to deal with the international tax evaders. After years of citing lack of powers the Kenya Revenue Authority (KRA) last year got teeth following publication of new rules.

The new regulations that brought into force the Tax Procedures Act 2015 gave the KRA powers to go after taxpayers who have been using legal gaps.

The taxman now has the power to interrogate transactions and reverse those it deems were structured with the sole intention of avoiding tax and, order payment of the tax plus a penalty.

The Act, which became effective on January 19 last year, gives the taxman the authority to charge the taxpayer double the amount initially due if a transaction is deemed to have been intentionally structured for purposes of avoiding tax.

“If the (KRA) commissioner has applied a tax avoidance provision in assessing a taxpayer, the taxpayer is liable for a tax avoidance penalty equal to double the amount of the tax avoided,” says the provision signed into law by President Uhuru Kenyatta on December 15, last year.

A 2015 report by the Tax Justice Network­Africa said Kenya’s corporate sector leads Africa in tax avoidance, estimating that the KRA could collect an additional Sh106 billion annually with close monitoring of multinational operations.

Kenya, it added, loses about Sh640 billion annually through tax evasion.

The Oxfam report cites small traders as the biggest losers of a skewed tax policy that favours global corporates.

“Jane Muthoni, 50, runs a roadside stall in one of Nairobi’s slums. She can’t afford a business licence to allow her to sell her produce formally to the supermarkets.

“In an area with no proper roads and where they have running water only three days a week, she and her fellow traders were still being asked for Sh50 a day in local taxes,” says the report.

“These fees were very damaging to businesses that only operate with about Sh100 to Sh200 stock.

“Meanwhile, the Kenyan government is giving away tax incentive packages to big corporations in the newly established special economic zones.”