Kenya loses an estimated Sh639 billion annually in tax evasion by multinational corporations, significantly hampering economic growth.
A report released by the Tax Justice Network - Africa (TJN-A), an affiliate of the African Union, said available documents and statistics from multinational companies only trace about Sh146 billion lost in trade mis-invoicing between 2002 and 2011.
“The money ends up in tax savings in multinational headquarters and subsidiaries, while data from local firms are manipulated to read losses,” said TJN-A policy and advocacy manager for Africa, Mr Savior Mwambwa, during the launch of the report in Nairobi.
Mr Mwambwa added that many local firms continuously manipulate accounts and shift their profits to subsidiaries.
An example is Mauritius where policies allow for low tax rates and tax secrecy.
The report of the ‘High Level Panel on Illicit Financial Flows from Africa’ profiled Kenya, Ghana, Mozambique, Tanzania and Uganda.
Tax evasion forms the major part of financial fraud in the country, followed by commercial transactions and criminal activities (money laundering, and drug, arms and human trafficking).
Bribery, corruption and abuse of office also make up the list of financial fraud in Kenya.
The trend, the report says, is rampant in financial services and the horticultural exports industry.
Telecommunications business is also affected through SIM box fraud, which costs Kenya over Sh500 million a month.
“The most serious consequences of illicit flows are the loss of investment capital and revenue that could have been used to finance development programmes, the undermining of state institutions and a weakening of the rule of law,” said the report.
It singles out a change in policies per country, with strict measures in place for multinational and local firms in terms of financial audits with the aim of restricting illicit money transfers.
The report recommends thorough investigations of the financial sector and placement of tight laws on financial audits.
United Nations Economic Commission for Africa senior adviser Adeyinka Adeyemi said that in the countries under investigations, ministers for finance are part of the tax loopholes that the countries face.
“We need a mechanism to continuously monitor financial fraud in Kenya and the entire African region which suffers $50 billion a year,” he said.