Is economy suited for local or global firms?


The Kenya Revenue Authority offices in Nairobi. FILE PHOTO | NMG

Is our economy structured for transnational brands at the expense of local brands who aspire to be transnational? That is the basic question Kenya is grappling with if we are to analyse its tax policy from last week’s event.

On Wednesday, the Tax Appeal Tribunal ruled in favour of Kenya Revenue Authority (KRA) in a dispute case against Keroche Breweries where the taxman slapped tax arrears amounting to Sh9 billion on the company.

Both sides have compelling arguments.

One of the cases on Vienna Ice brand of Vodka, which is estimated to contribute 40 percent of the company’s revenues, Keroche argues that the ready-to-drink vodka is the crescent vodka diluted with water, therefore, when applying excise tax, it should only apply to the alcoholic component of the drink since dilution process doesn’t amount to manufacturing.

On the other hand, the KRA argues that the process undertaken by Keroche was compounding of the spirits, which amounts to the manufacturing of a new product, therefore, the excise duty should be levied on the whole product and Keroche has been evading tax.

But where there is more than meets the eye is how the taxman has been handling Keroche. After the tax appeal ruling, the KRA moved to freeze the company’s bank accounts instructing its bankers to pay the tax bills or they would be held responsible. Instead of entering into a settlement plan because Sh9 billion is a heavy cost to the company, the taxman chose to ground the operations of the company by attaching their accounts.

This case arose in 2015 when KRA introduced a new formula to be applied on the Vienna Ice brand, raising the excise tax from Sh26 a litre to 120 and backdated to a year back billing the company Sh1.3 billion in tax arrears.

Here again, the KRA hastily went ahead to formally withdraw the licence of the company when the taxman was unfairly asking Keroche to pay for tax arrears it did not collect from more than 11 million litres of the product it had already sold.

The other appeal is concerning the classification of pineapple-based wines where Keroche argues that it produces fortified wines, which have a lower excise duty rate of 40 percent while the KRA argues that tax rate is for wine-based on grapes when Keroche’s fortified wine was purely fermented pineapple, which is a different classification of 60 percent excise duty.

Now, the question the KRA is avoiding to answer here is that how did this happen when it closely monitors excise duty since its incorporated at production stage during manufacturing by their team and regularly monitored at all manufacturers plants. How did they fail to detect this wrong classification?

This reminds of the 2006 dispute between Keroche and the KRA again when the taxman backdated tax arrears nine years back on one of the company’s wine products and billed the company Sh1.1 billion in tax arrears.

But like Keroche and many local taxpayers are being flogged by the taxman for any remaining shilling in their pocket.

The President while launching locally-assembled Mahindra cars directed the National Treasury and the KRA to immediately institute action on reducing taxes on vehicles fully-assembled in Kenya.

This means global automobile brands that have a local assembly in Kenya including Toyota, Peugeot and Volkswagen will be receiving tax incentives.

What this means is that local taxpayers are paying their fair share of taxes to subsidise multinationals profit-seeking in Kenya, a tax inequality globalisation defect that leads to uneven development.

We are ready to kill a locally based company with taxes to build global brands with tax incentives who will repatriate their big profits to their mother countries.

If transnational firms being rewarded place-based production tax exemptions, then Keroche fairly qualifies for them too, and there is a precedence in the NIC and CBA merger where the two entities were exempted from paying millions in share sale tax.