Rich Kenyans, who have been flaunting their wealth with multi-million-shilling purchases of big cars, helicopters and palatial homes, have caught the attention of the taxman and will henceforth have to make full disclosure of their incomes to a special team of tax collectors.
The Kenya Revenue Authority (KRA) says a sharp increase in imports of the luxury items and multi-million-shilling investments in real estate has opened its eyes to the massive tax leakage, which if tapped could yield billions of shillings in additional revenues to the Exchequer.
The taxman’s argument is supported by the fact that only a few Kenyans have officially registered as belonging to the high-income earners’ bracket.
Only 100 people have registered as earning annual incomes of more than Sh44 million – the threshold for classification as a high net-worth individual – despite the massive growth in conspicuous consumption in areas such as Nairobi.
The average annual declared income for the top 100 registered taxpayers stood at Sh77 million, according to KRA’s income tax department while that of the top 1,000 individual taxpayers stands at Sh14 million, raising questions on the source of money that is being used to purchase the luxury items.
The taxman’s argument is also supported by the fact that the prices of luxury items such as helicopters stand way beyond the incomes officially declared by the top 1,000 individual taxpayers.
The Kenya National Bureau of Statistics (KNBS) has also published data showing that 40,000 people in Nairobi alone live in high high-end housing estates where the average home prices range between Sh35 million - Sh65 million-- way above the declared incomes.
KRA is responding to this market anomaly with the establishment of a special unit that will pursue all High Net-Worth Individuals (HNWIs) for rigorous tax assessment to reconcile their incomes against the huge expenses.
“The formation and operationalisation of this unit will be immediate,” KRA’s head of communications told the Business Daily.
Industry statistics show that the purchase of luxury cars has risen steadily in the past five years, indicating growth in the number of people buying them.
Luxury car sales remained stable in 2011 despite the harsh economic times, according to the Kenya Motor Industry (KMI) data.
Some 198 luxury vehicles including BMW, Mercedes Benz, Range Rover, Hummer, Jeep and Chrysler were bought in 2011, compared to 204 the previous year.
The number of aircraft purchases has also risen, driven by orders from wealthy individuals and companies.
The Kenya Civil Aviation Authority (KCCA) data shows that Kenya had 1,056 registered aircraft at the end of June 2011 compared to 1,031 at the end of 2010 – an increase of 26 aircraft in 12 months.
A massive 84 per cent of the registered vessels are light aircraft weighing up to 10,000kgs that are popular with individual owners or firms operating light charter flights.
The taxman says these figures show a clear mismatch between actual wealth in the hands of individuals and what they have officially declared.
“There is adequate reason to believe that Kenya’s revenue collection potential will be considerably enhanced through an aggressive strategy to identify and tax HNWIs,” John Njiraini, KRA director-general says in the authority’s strategic plan for 2012/13-2014/15.
Kenya’s 2011/12 tax revenues rose 14.4 per cent compared to the previous year, but still missed its collection target due to inflation, high oil prices and a weaker shilling.
This has left KRA and the Treasury under huge pressure to widen the tax net amid growing expenditure needs arising from the coming into force of the new Constitution.
KRA collected Sh707.4 billion for the 2011/12 fiscal year compared to 634.9 billion the previous year, but against a revised target of Sh716.9 billion for 2011/12.
The special unit that will deal with the cream of Kenya’s taxpayers is made up of specially trained auditors, lawyers and risk analysts from KRA’s domestic tax department (DTD) and the medium and small taxpayers’ office (MTO).
“A lot of work has been done with regard to the formation of this team and things will be rolling on soon,” Mr Onyonyi said.
High net-worth individuals remain the biggest headache for tax collectors throughout the world because of the complex methods they use to keep their wealth – including in off-shore tax havens.
Most are known to use international instruments, multiple business interests, both local and foreign, trusts and trust-like instruments and foreign entities to avoid taxation.
But experience has also shown that roping these individuals into the tax net usually involves use of considerable amounts resources, may take ages and requires the co-operation of people or agencies in other jurisdictions.
Sammy Onyango, a tax partner at Deloitte, termed KRA’s plan a step in the right direction that should make everyone to account for whatever they spend and disclose its source.
Countries such as the UK have taken to monitoring the purchase of basic items such as holiday packages, air tickets and homes to catch tax cheats.
Such expenses are reconciled against the income returns filed by taxpayers at the end of the accounting period to determine the integrity of the data.
“If well done this compels for disclosure of other sources of income especially in cases where we have a miss-match of expenditure versus income,” Nikhi Hira, a tax analyst said.
As part of a strategy to deal with the suspected dodgy-taxpayers, KRA said it will rely on data automation to monitor resources and expenditure as well as use Double Taxation Agreements (DTAs) and Tax Information and Exchange Agreements (TIEAs), with the tax havens to monitor the rich.
“We are already members of the global tax information sharing agreement and this will help us in pursuing the fishy international financial transactions that may have escaped the tax radar locally,” Mr Onyonyi said.
Kenya presently has double taxation treaties with the UK, Canada, Denmark, Norway, India, Sweden, Zambia and Germany.
Negotiations are ongoing to sign similar arrangements with France and Italy.
Besides, Kenya has draft agreements for negotiation with Seychelles, Nigeria, South Africa, Mauritius, Finland, Russia and Iran.
New double-taxation treaties (DTTs) with key trade partners such as the East African Community (EAC) and the United Arab Emirates (UAE) have been concluded.
Parties who get these deals are protected from double taxation, one of the demands that are keeping investors at bay.
KRA also plans to use other programmes including the real estate and transfer pricing to support the HNWI initiative.
The taxman is presently mapping all real estate property as it prepares to crack the whip of errant landlords who have not been remitting taxes on income earned from rent.
The tax man hopes data from the mapping exercise will help shed light on individuals who have declared less than they actually earned.
Some analysts, however, said identifying the HNWI could be an uphill task for KRA especially if international partners failed to share information on financial transactions conducted outside Kenya.
“Wealthy individuals tend to hide behind proxies and unmasking them can be so tedious especially if the tracking systems are not well integrated,” Mr Onyango said.
Mr Hira said a comprehensive use of the personal identification number (PIN) could help boost the purge of tax –dodgers.
“What we required is a properly integrated system where by all transactions are conducted on the strength of the PIN (personal identification number) such that the authorities are able to keep track of every single activity,” he said.
“The tax dodgers will have no option, but either to hide their dirty schemes better or fully disclose their operations,” Mr Hira said.