KRA opens new battlefront with multinationalsWednesday August 20 2014
The Kenya Revenue Authority (KRA) has turned the heat on cash-rich multinationals, accusing them of using grand tax evasion schemes to deny the government billions of shillings it needs to meet its obligations to the citizens.
The taxman’s claims, which the multinationals deny, have sparked a flurry of multi-billion-shilling suits that are expected to define the future of corporate tax in Kenya.
So far, the battle over multinationals’ tax obligations has generated 40 cases before the arbitration tribunal and a similar number in court, underlining the KRA’s aggressiveness and the muscle of the companies on its radar.
Tax experts said the suits are most likely related to the KRA’s interpretation of transfer pricing rules that the multinationals have contested.
“In most of the cases they are dealing with transfer pricing which deals with multinationals. Their understanding is that the multinationals are hiding their profits, which is not good because it interferes with taxpayer relations,” said Martin Kisuu, a tax consultant with Taxwise Consulting Limited.
Mr Kisuu described transfer pricing as a new area and a learning curve for everyone, and not a precise science heralding differences of opinion among practitioners.
The list of companies that have recently gone to court against the taxman’s mega tax claims include Kenya-Re, which is facing a Sh1.2 billion bill, and cement maker Bamburi which has been billed Sh942 million.
The KRA said its targeting of the firms is based on risk profiling and expansion into areas it has not aggressively pursued in the past.
“KRA usually picks on areas where compliance has been low and the legal framework previously hazy,” said commissioner for domestic taxes – large taxpayer office Pancrasius Nyaga.
READ: Tax evasion sting recovers Sh25bn from multinationals
The KRA has previously announced that it was pursuing a large number of multinationals for Sh25 billion following transfer pricing audits.
It started tightening the noose around transfer pricing in 2011 when it announced plans to increase the number of staff in the large tax department.
Transfer pricing involves use of foreign subsidiaries or related parties to drastically reduce taxes due to local authorities. The eruption of court cases is the culmination of the taxman’s audits that began in 2011.
Bamburi says in its annual report that its tussle with the KRA started in February 2012 when the authority issued it with a tax assessment bill of Sh3.9 billion composed of Sh2 billion as principal tax and penalties and interest amounting Sh1.9 billion.
“This assessment is in respect of the company’s corporate tax, value added tax and withholding tax affairs for the years 2007 to 2011,” the firm says.
The amount was reduced to Sh2.67 billion last August but the cement maker appealed the decision before the local arbitration committee.
Mr Nyaga said the taxman won five of the seven issues raised before the committee and Bamburi sought the court’s intervention on the matter.
Bamburi has gone to court to stop the KRA from collecting Sh942 million before it fully exploits the appeal process.
“The local committee erred in failing to consider that the manufacturer had provided, over and above the transfer pricing report, additional documentation on a sample basis of the services provided,” Bamburi says in its court papers.
The Treasury has more recently been working on tax laws to ensure clarity on transfer pricing.
“To further deter misuse of transfer pricing scheme, I have proposed an amendment on the definition of permanent establishment to restrict transactions between related parties and their local establishment at an arm’s length for tax purposes,” Treasury secretary Henry Rotich said in his 2014/15 Budget speech.
READ: Rules on transfer pricing to rein in rogue global firms
The court cases arise from differences over the letter or principle of law that the KRA uses to impose tax demands.
The battle is hinged on the fact that the parties have conflicting interests on the subject of taxation with businesses seeking to minimise tax expenses to maximise profits while the taxman seeks to grow its collection to meet targets set by the Treasury.
Kenya-Re was slapped with a corporate tax demand note of Sh258 million and a Sh960 million withholding tax bill on commissions and brokerage fees.
“Out of the total assessment of Sh258 million, management made payments of Sh103 million in 2013. The remaining amount of Sh156 million is the subject of ongoing discussions with the KRA to establish the KRA’s basis for the assessment,” said Kenya-Re in its financial statement.
The Nairobi-listed reinsurer has made a provision of Sh139 million relating to the outstanding corporate tax assessment but did not set aside any money for the Sh960 million claim arising from commissions and brokerage fees based on the opinion that it would not be payable.
“KRA has included brokerage deducted by brokers resident in India, the United Kingdom and Zambia. These countries have a double taxation treaty with Kenya,” Kenya-Re says in its court filings.
Mr Nyaga noted that Kenya-Re had not exploited the local arbitration process before going to court.
The haste by Kenya-Re to seek court protection underlines the panic among corporates in a row with the taxman.
Karuturi Flowers made an out-of-court settlement of Sh340 million ($4 million) last year after it got a Sh1.7 billion ($20 million) invoice from the taxman.
International lenders Barclays Bank and Standard Chartered have noted in their annual report that they are facing demands from the taxman but they have both not made any provisions to settle the claims, stating they were confident the money was not payable. Barclays Bank has gone to the Court of Appeal.
Tightening of the loopholes helped the taxman achieve its revenue target of Sh963 billion with large taxpayers’ contribution jumping 15.3 per cent to Sh431 billion.
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