Beware tax loopholes in 2019 Finance Bill

The recent headlines of how three Kenyan scammers stole over Sh300 million from American firms is the tip of the iceberg as to how dangerous tax loopholes can be to national security.

Robert Mutua Muli, Amil Hassan Raage and Jeffrey Sila Ndungi were pursued by the Federal Bureau of Investigation (FBI) and charged by US Department of Justice for the theft of Sh315.4 million, half of which has not been recovered.

DUSIT ATTACK

The story of Ndungi is, perhaps, the most interesting in how it reveals linkages of illicit financial flows to money laundering within business spaces — such as the real estate or aviation sector; and the impact of identity theft in declaration of fake tax returns among other activities, all of which result in undermining domestic revenue mobilisation.

The ease with which money comes in and goes out of Kenya has caused considerable loss of life and property, as seen during the Dusit D2 attack’s linkages to lax monitoring of money transfer safeguards.

Meanwhile, improvements in internet connectivity, availability of cheap computers following government incentives and a robust financial sector driven by technology are merging into a nefarious environment in which tax loopholes are making Kenya a rising cybercrime hub, so much so that the US government has set up a special unit monitoring criminal Kenyan IP addresses.

This is only possible because of tax loopholes — like the 2018 amnesty, where the government exempted foreign income from tax payment and scrutiny in line with the Proceeds of Crime and Anti-Money Laundering Act (Pocamla) of 2009 or any other Act relating to reporting and investigation of financial transactions.

FLAG IT

Finance Act 2018 amended the Tax Procedures Act 2015 by including Section 37B (4), which extended the amnesty by one year. But the Finance Bill 2019 is silent on this amendment despite civil society advocacy for its removal, and despite the clause posing a security threat and a risk of economic sabotage.

Going by the effortlessness with which Ndungi transferred his illegal earnings during the amnesty period, there seems to be a legislative — if not policy — conundrum as to how things would stand now. The questions are, why would Parliament develop such a flawed law and why would MPs fail to flag it?

While the amnesty was intended to encourage remittance of funds into the country to boost the economy, research increasingly shows such tax incentives are counterproductive as investors mostly consider other factors in determining whether the business climate is favourable enough for them to invest in it.

INCENTIVES

Studies such as the literature review by Simon Munongo, Zurika Robinson and Olusegun Ayo Kanbi on whether tax incentives matter for investment reveal how data is increasingly showing that “though tax incentives might be important in attracting FDI they are [only] more effective when combined with other non-tax factors”.

Tax incentives are, probably, less of a factor in investment decisions as compared to security, macroeconomic stability, good infrastructure and the existence of effective, if not strong, institutions that bolster the attractiveness of economies for the receipt of FDI.

MPs should, therefore, clarify the tax loopholes and delete, if necessary, the offensive sections of the law as they read, debate and pass Finance Bill 2019.

Mr Wanyama is coordinator of the East Africa Tax and Governance Network (EATGN). [email protected] @EATGN