Some multinationals operating in the country claim they “pay expatriates less than local employees”, exaggerate costs of imported goods, export very cheaply and pay huge fees for unknown services, according to a review on the loopholes used to avoid paying billions of shillings in taxes.
The companies under scrutiny, which sometimes enjoy a raft of tax exemptions, also abuse the privileges given to them by the government when asked to provide information — including resorting to use their local languages in official documents sought by the Kenya Revenue Authority (KRA).
In response to enquiries by the Sunday Nation, KRA said it had recovered some Sh9.3 billion from auditing close to 150 multinationals in the last four years, revealing how deep the problem is. Another Sh6.1 billion remains contested.
The taxman says eight out of 10 multinationals in Kenya grossly under-declare salaries they pay to the expatriates while only one out of 10 can support the heavy expenditures they claim to have incurred in procuring services, a move that cuts down their profits and corporate tax in the process.
“Only payments made locally are taxed while the foreign component is declared elsewhere. The most shocking thing is that the affected multinationals would present employment records which cannot make sense to any taxman. For instance, a junior local staff would be said to be earning more than their seniors who are expatriates,” KRA acting Commissioner for Domestic Taxes Ruth Wachira said in response to queries about tax evasion and avoidance by multinationals.
The multinationals, some of which have moved to Kenya in the last decade to use the country as a gateway to East and Central Africa, also overprice the goods they import through a scheme that involves invoicing for an import through a different country.
A car purchased from Japan would, for instance, be invoiced from Mauritius — a tax haven — and leave Kenya with no tax to collect in the process.
The invoice from Mauritius would be much different from the one used in clearing the car at the port of Mombasa scaling down on custom duty and import value added tax while inflating the purchase in the accounting to shift the profits to other low tax jurisdictions.
KRA says some foreign firms in the agricultural sector, on the other hand, under-price their exports to declare meagre profits making Kenya an easy jurisdiction to simply make money and pay no tax.
“A number of exporters, especially in the agricultural sector, who manipulate prices for exports through overseas related parties, have been audited and huge arrears raised. Some of them have since gone under and we are in the process of recovering tax through disposal of assets under court processes.”
Although KRA did not immediately disclose the companies involved in this scheme, citing taxpayer confidentiality, the troubled Naivasha-based flower farm Karuturi Ltd — the Kenyan subsidiary of the world’s biggest producer of cut roses which went under in February 2014, had been accused of being a tax dodger.
KRA had taken the firm to court to demand Sh962 million accusing it of transfer mispricing, a method used by multinationals to trade internationally with their own subsidiaries.
While the local firms would make losses, the parent companies continue to make profits.
Another flower firm based in Naivasha went to court in 2016 to fight Sh1.1 billion demand by KRA when it was accused of restricting the sale of its flowers to its parent firm in the Netherlands to avoid paying taxes to the government.
The Dutch flower dealer Van den Berg Kenya Ltd (VDB-K) had been selling most of its flowers to its Dutch parent firm at extremely low prices to cut the amount of tax it can pay.
VDB-K has sued the taxman saying the demand was grossly exaggerated, but KRA insists its in-depth audit of VDB-K revealed that the company has been colluding with its parent firm to dodge taxes.
Tax Justice Network Africa Executive Director Alvin Musioma told Sunday Nation that the Sh9 billion KRA collected between 2014 and 2018 is the tip of the iceberg given the increasing number of multinationals and the taxman’s capacity to audit them.
“This is just a small portion of the larger problem given the position of Nairobi as a financial hub and earlier evidence that Kenya loses even more through transfer pricing alone. We need to relook at our Double Taxation Agreements (DTAs) with some of these countries known to be tax havens and ensure our policies are coherent in making any treaty arrangements that may work to the disadvantage of the country,” Mr Musioma said.
KRA, which has since doubled the number of its transfer pricing auditors to 34 in the last two years to curb the tax loopholes exploited by multinationals, also listed the use of the taxation agreements as one of its key strategies to limit the tax bleeding.
Multinationals exploit the thin line defined by the DTAs on the threshold of activities required before an entity is said to be carrying business in Kenya to subject it to corporate tax. KRA says they use their branches in Kenya to artificially strip their functions to appear as if they are doing less than they are actually doing.
The firms are also said to be frustrating the taxman by making it difficult for auditors to access information and giving it in their local languages when forced to.
In 2016, two Chinese multinationals were accused of frustrating KRA officials trying to track their tax evasion schemes amounting to billions of shillings by giving information in Chinese.
ZTE Kenya Limited, a subsidiary of a Chinese tech giant that supplies telecommunications equipment in the country and China Aero Technology International Engineering Corporation, were accused of “failing to maintain records in the official language “as required by the commissioner”.
The Dutch flower dealer VDB-K had also been blamed for failing to provide crucial information such as details of sales between it and its Dutch parent as some of the documents given were written in Dutch, making it hard to use a tax calculation method agreeable to both parties.
KRA now says it has come up with punitive measures to smoke out information from the multinationals playing hard to deny them chances of winning multi-billion-shilling tenders in the country.
“We have designed other punitive measures which are proving very effective. Among them is to ensure the multinationals refusing to provide documents are denied tax clearance certificate, which is mandatory to participate in a government tender,” KRA said in a statement.
The dirty games played by the foreign firms add to the losses already incurred by the country through the provision of tax incentives to the firms, a loss ActionAid and Tax Justice Network Africa estimated at Sh110 billion ever year in foregone customs duties or VAT payments to ostensibly encourage foreign investment.
The Global Financial Integrity report estimates that Kenya loses about Sh11.5 billion annually from transfer mispricing among multinationals.
In 2013, KRA audited 40 multinationals uncovering a widespread abuse of transfer pricing and recovering some Sh4 billion making the latest audit a major breakthrough in sealing loopholes used by multinationals to deny Kenya billions in revenue as local residents struggle to bear the tax burden to fund the government amid tough economic conditions.