A Kenya Revenue Authority (KRA) audit has forced a number multinationals to rewrite their financial statements, turning losses into profits in a review that has yielded Sh25 billion in tax revenues.
The companies had used transfer pricing to declare losses, which effectively disqualified them from paying income tax.
But a KRA audit of 40 conglomerates discovered widespread abuse of rules that allow deductions of the prices charged when one unit of a multinational group buys or sells product from another part of the same group but in a different country.
The prices charged impact their level of profits and multinationals have used the accounting tool to legally dodge some income taxes by lowering earnings or declaring losses -- on paper only.
“We have carried out over 50 transfer pricing audits with a total tax yield in excess of Sh25 billion whose collection is in various stages of enforcement,” said KRA commissioner-general John Njiraini on Friday.
“A significant proportion of the audit effort has seen the claw back of loss positions accumulated by the companies, meaning that these corporates are now in tax payment positions in respect of their future operations,” he added. He was addressing an international taxation seminar at the University in Nairobi hosted by the African
International Business and Management (AIBUMA). The taxman did not mention the period the audit covered, but said it started with the creation of a dedicated team to track the multinationals after 2009. The identity of the multinationals was also not revealed.
The culprits are expected to agree with KRA on a payment schedule that will enable them to clear the tax. The multinational companies (MNCs) have been accused of devising complex transfer pricing mechanisms that enable them to cheat poor countries of tax revenues they need to improve the quality of life for their citizens.
For instance, some disbursed expensive loans to the Kenyan associates or purported to charge them for ridiculously over-priced management services that ate into the local company’s profits, leading them to declare losses.
Conservative estimates from the US-based international financial watchdog, Global Financial Integrity (GFI), have put Kenya’s transfer pricing-related tax losses in the past 10 years at Sh115 billion or Sh11.5 billion annually.
The amount is equivalent to half the budget Kenya has allocated to 47 counties in the current financial year to tackle unemployment, the broken health system and to revamp infrastructure.
Most of the money is lost through clever accounting involving intra-company deals that account for between 50 and 60 per cent of cross-border trade.
Mr Njiraini said KRA would take advantage of the growing global consensus on prevention of tax avoidance to eliminate revenue leakage through transfer pricing.
KRA joined the Global Forum on Transparency and the Exchange of Information for Tax Purposes in 2010 hoping to use the network to intensify its fight against transfer pricing.
“We have signed tax information exchange agreements with seven jurisdictions while others are at various stages of negotiation,” said Mr Njiraini.
Kenya is also en-route to ratifying the Multilateral Convention on Mutual Administration Assistance in Tax Matters that would give KRA automatic access to tax information held by 56 countries.
The taxman has also formed a partnership with the Central Bank of Kenya, Capital Markets Authority and the registrar of companies to track ownership of firms and access to their bank details.
“This will not only help in meeting our global obligations but also locally in being able to keep track of tax defaulters,” said Mr Njiraini.