Developing countries, including Kenya, could be losing billions of shillings to global corporations which move money across borders to their several subsidiaries while undervaluing their transactions.
The practice, called trade misinvoicing, is the largest component of illicit financial outflows measured by Global Financial Integrity.
A report by the United Nations Conference on Trade and Development (UNCTAD) revealed that commodity-dependent developing countries are losing as much as 67 per cent of their exports worth billions of dollars to trade misinvoicing.
The study, released during the Global Commodities Forum, uses up to two decades’ worth of data covering exports of commodities such as cocoa, copper, gold and oil from Chile, Côte d’Ivoire, Nigeria, South Africa and Zambia.
“This research provides new detail on the magnitude of this issue, made even worse by the fact that some developing countries depend on just a handful of commodities for their health and education budgets,” UNCTAD Secretary-General Mukhisa Kituyi said.
The analysis shows patterns of trade misinvoicing for exports to China, Germany, Hong Kong (China), India, Italy, Japan, the Netherlands, Spain, Switzerland, the United Kingdom of Great Britain and Northern Ireland, the United States of America and others.
Kenya has witnessed cases of the vice when in 2012, flower firm Karuturi was alleged to have been involved in tax evasion.
The Kenya Revenue Authority started the process which would later determine that the Naivasha based multinational used transfer mispricing to avoid paying the government nearly Sh2 billion at today’s exchange rate ($20 million) in corporate income tax.
Lobby groups argue that he government has been opening a loophole that allows super rich individuals and multinational companies to avoid taxes especially Double Tax Agreements with countries that charge little or no tax.
The Tax Justice Network (TJN), a lobby group, has sued the government over agreements, which it says are robbing Kenya of the ability to raise revenues domestically, driving the country to the brink of a financial meltdown.
Listed firm Flame Tree Group came under the spotlight over possible transfer pricing to take advantage of this and reduce tax paid in the country.
The Flame Tree Group has trading subsidiaries in both the UAE and Mauritius that have very friendly taxation regimes on profits made by corporations as well as on capital gains.
According to a report in a local daily, the manufacturing arm reported a loss of about $220,000 in Kenya which charges a corporation tax here of 30 per cent while its trading arm called Cirrus, based in Dubai, generated about $2 million where nor corporation tax is charged.
The net profits were then consolidated in the parent office in Port Louis Mauritius - where corporation tax is three percent.
Several multinational companies have subsidiaries in Kenya and Mauritius which effectively expose the country to possible revenue losses under the Double Tax Agreement.