KRA launches probe of tax-dodging companies

The taxman is investigating firms suspected to be dodging taxes by colluding with overseas partners.

The audit by the Kenya Revenue Authority targets tea and flower firms, all representing key growth sectors, and which are suspected of employing questionable practices to siphon off profit from Kenyan operations to foreign-registered entities in a practice known as transfer pricing.

KRA commissioner for domestic taxes Pancrasius Nyaga said the planned annual audits will be expanded to include the gas and mining sub-sectors. This is because of the high-risk profile of the export-oriented sectors.

“We are now focusing on enacting the law for oil and gas sectors after which we will begin audits of the extractive sector.”

“We have done audits in the flower and tea sectors. We have concluded one case, about Sher Karuturi. We are ready to start litigation now,” said Mr Nyaga in a telephone interview.

The official could not provide a list of the affected companies because some of them have sued KRA.

CONSISTENT TAX LOSSES

Mr Nyaga said the audits were launched last year after most of the multinationals in the sector returned consistent tax losses and sometimes very little taxable profits.

“We had several cases of flower farms that persistently reported losses, hence the launch of audits. We asked ourselves, ‘what is the commercial sense of being in business if these firms were persistently making losses?’” he said.

Ms Jane Ngige, CEO of the Kenya Flower Council, said the industry was well-regulated by the revenue authority and defaulters had been caught.

“KRA is on top of things. They have carried out several audits and due diligence,” she said, adding, payment of refunds to flower firms confirmed they were tax-compliant.

“The issue of tax evasion by Sher Karuturi has been in the public domain,” she added.

In April 2013, troubled Sher Karuturi was found guilty of tax evasion. The global flower industry giant, which is the world’s biggest producer of cut roses, was found guilty of tax evasion, marking the first time an African government had brought a large multinational company to court for transfer pricing through a fully public process.

In late  2012, KRA ruled that the India-based multinational used transfer pricing to avoid paying the government nearly $11 million (Sh946 million) in corporate income tax, part of a larger set of tax disputes with government authorities that amount to a quarter of the firm’s 2012 sales.

SEPARATE ENTITIES

Karuturi appealed the ruling, bringing the proceedings into the public domain.

The company produces 580 million roses per year from its Kenyan, Ethiopian and Indian operations, with estimates showing one in nine roses bought into Europe come from a Karuturi farm.

Its Kenyan shipments to Europe goes through a subsidiary in Dubai. By under-declaring the value of the merchandise shipped to its warehouse in Dubai, the firm saves on its tax bill in breach of Kenyan law.

The Income Tax Act requires transactions between resident companies and their related non-residents to be at arm’s length when determining the price at which a transfer of goods or services between them is set.

The Minister for Finance, in the 2006 budget introduced the Income Tax Rules. The range of transactions that are subject to an adjustment include the sale, purchase and leasing of goods, other tangible and intangible assets, the provision of services and interest on loans.

These transactions should comply with the arm’s length principle, meaning that if a multinational company, say, has a subsidiary in India and another in Nairobi, as with Karuturi, the two should be viewed and treated as separate entities

Multinationals’ role in tax-related crimes came under scrutiny at a regional prosecutors conference last week in Lusaka, Zambia, with Director of Public Prosecutions Keriako Tobiko expressing regret that a lack of specialist prosecutorial personnel had emboldened unscrupulous multinational corporations who wantonly commit financial crimes.

Mr Patrick Obath, an oil industry consultant, said the country needs sound laws and expertise to capture costs to avoid shifting profits to other tax jurisdictions.