KRA busts Sh8bn tax evasion scam involving multinationals

The taxman has forced more than 10 multinational companies to rewrite their financial statements, turning Sh8 billion losses into profits that have yielded Sh4 billion in tax revenues.

The companies had used the transfer pricing mechanism to declare losses that effectively disqualified them from paying income tax.

But a Kenya Revenue Authority (KRA) audit of 40 multinationals discovered widespread abuse of transfer pricing – the accounting world’s lingo that is used to describe the costing of transactions between multinationals and their subsidiaries – to declare losses and evade taxation.

“The audit has seen a claw back of loss positions accumulated by these companies to the tune of Sh8 billion, moving them to tax payment positions with respect of future operations,” said KRA commissioner general John Njiraini.

Most of the suspect transactions involved local companies and their subsidiaries located in tax havens that do not charge income tax or whose tax rates are much lower than Kenya’s 30 per cent.

KRA said subsidiaries of the transnational companies in the tax havens had, for instance, 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.

KRA said it had busted the tax evasion syndicate by comparing what the tax haven-based associates of local firms had charged with the prevailing market prices of the goods and services.

Mr Njiraini said that more than 40 companies were audited cutting their losses by Sh8 billion and leading to a tax liability assessment that found that Sh4 billion had been lost in the transfer-pricing racket. The culprits are expected to agree with KRA on a payment schedule that will enable them to clear the tax.

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.

(READ: Poor nations lose Sh94bn daily to tax cheats, says Oxfam)

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 what Kenya plans to spend on the payment of interest on foreign loans in the current financial year.

“Whatever financial regulations may be in place or may be contemplated have not yet had an effect on the continued passage of funds out of poorer countries, through the global shadow financial system, and ultimately into richer western economies,” says a recent GFI report.

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. He was addressing an international taxation seminar at Strathmore University in Nairobi.

KRA joined the Global Forum on Transparency and the Exchange of Information for Tax Purposes in 2010 hoping to use the network to prevent revenue losses through misuse of accounting practices such as transfer pricing.

“We have signed tax information exchange agreements with five 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 KRA is also reviewing its information exchange framework in readiness for an international meeting in Paris next month. The initiative aimed at preserving the integrity of Kenya’s financial system involves the Central Bank of Kenya, Capital Markets Authority, KRA and the Registrar of Companies.

KRA is hoping to use the information exchange framework to access information on people’s bank accounts, business registration and tracking of their ownership of property.

“This initiative should significantly enhance transparency in the area of business registration, tracking of property ownership and access to bank information. It should help us to not only meet our global obligations but also track tax defaulters locally".

Mr Njiraini gave the example of Google’s UK subsidiary that was recently found to have been evading taxes amounting to millions of sterling pounds (paying a paltry 3.7 million sterling pounds (or 0.1 per cent) of its three billion sterling pounds turnover.

The extent of tax evasion is further demonstrated by the fact that the largest government IT suppliers in the UK made sales of 62 billion sterling pounds in the past five years but only paid taxes worth 527 million pounds or 0.85 per cent of turnover.

“Corporate cheating on taxes has become a global scourge which has served to energise governments into taking coordinated action to stem the menace,” said Mr Njiraini.

The list of tax havens – where the tax rate ranges between zero and 15 per cent – includes Vanuatu, Seychelles, Samoa, Panama, Mauritius, Bermuda, Bahamas and Monaco.