Multinationals exploit loopholes to evade tax
Kenya Revenue Authority Commissioner General John Njiraini. The tax man is loosing billions as global firms beat weak systems to remit low tax bill. Photo/FILE
What you need to know:
- A common scenario, according to Ernst & Young, is a company producing goods in one country and selling in another country with the sole intention of benefitting from tax advantages in low-tax jurisdictions.
- The Kenya Revenue Authority recently busted a tax evasion syndicate involving more than 10 multinational companies.
Kenya is among African countries that are losing billions in unremitted taxes as multinational companies use complex ways to beat weak tax collection.
Tax experts at a conference held last week in Johannesburg said that multinationals exploit lax taxation rules in most African countries while evading stringent tax rules in their home countries.
“It is only fair for multinationals operating in Africa to be honest in their disclosure to respective tax authorities,” said South Africa revenue authority senior policy adviser Kosiwe Louw, adding that firms operating in more than one country need to explain their entire supply chain so that authorities can know what to tax.
A common scenario, according to Ernst & Young, is a company producing goods in one country and selling in another country with the sole intention of benefitting from tax advantages in low-tax jurisdictions.
TAX EVASION SYNDICATE BUSTED
The Kenya Revenue Authority recently busted a tax evasion syndicate involving more than 10 multinational companies that had falsified their financial statements, leading to losses of Sh4 billion in tax revenues. The companies had used transfer pricing mechanisms to declare losses that effectively disqualified them from remitting taxes.
Transfer pricing is an the accounting term used to describe the costing of transactions between multinationals and their subsidiaries.
Most of the suspect transactions involved companies and their subsidiaries that operate in tax havens that do not charge tax or whose tax rates are much lower than the 30 per cent tax on income charged in Kenya. According to EY Africa tax leader James Deiotte such firms enlist services of smart tax experts who study and advise on existing tax loopholes. While Kenya has transfer pricing rules, multinationals have devised complex transfer pricing mechanisms that enable them evade taxation.
It is estimated Kenya loses up to Sh11.5 billion annually as a result of intricate transfer pricing practices, according to Global Financial Integrity, a US-based international financial watchdog.
Africa Tax Administration Forum executive secretary Logan Wort said the nature of multinationals makes it complicated for countries like Kenya to determine whether such firms pay enough tax.
“They are perceived to be making a lot of money but their submissions to revenue bodies is little,” said Mr Wort.
He concludes that there is serious shortage of expertise and skills on the continent to seal loopholes in transfer pricing, hence the need for training.
