KRA busts Sh8bn tax evasion scam involving multinationals

KRA commissioner general John Njiraini: Corporate cheating on taxes has become a global scourge. FILE 

By GEOFFREY IRUNGU, girungu@ke.nationmedia.com

Posted  Thursday, September 12   2013 at  20:58

In Summary

• More than 10 multinational companies had used the transfer pricing mechanism to declare losses that effectively disqualified them from paying income tax.
• Most of the suspect transactions involved local companies and their subsidiaries located in tax havens that do not charge income tax or whose tax rates are much lower than Kenya’s 30 per cent.
• KRA said it had busted the tax evasion syndicate by comparing what the tax haven-based associates of local firms had charged with the prevailing market prices of the goods and services.
• The culprits are expected to agree with KRA on a payment schedule that will enable them to clear the tax.

The taxman has forced more than 10 multinational companies to rewrite their financial statements, turning Sh8 billion losses into profits that have yielded Sh4 billion in tax revenues.

The companies had used the transfer pricing mechanism to declare losses that effectively disqualified them from paying income tax.

But a Kenya Revenue Authority (KRA) audit of 40 multinationals discovered widespread abuse of transfer pricing – the accounting world’s lingo that is used to describe the costing of transactions between multinationals and their subsidiaries – to declare losses and evade taxation.

“The audit has seen a claw back of loss positions accumulated by these companies to the tune of Sh8 billion, moving them to tax payment positions with respect of future operations,” said KRA commissioner general John Njiraini.

Most of the suspect transactions involved local companies and their subsidiaries located in tax havens that do not charge income tax or whose tax rates are much lower than Kenya’s 30 per cent.

KRA said subsidiaries of the transnational companies in the tax havens had, for instance, disbursed expensive loans to the Kenyan associates or purported to charge them for ridiculously over-priced management services that ate into the local company’s profits, leading them to declare losses.

KRA said it had busted the tax evasion syndicate by comparing what the tax haven-based associates of local firms had charged with the prevailing market prices of the goods and services.

Mr Njiraini said that more than 40 companies were audited cutting their losses by Sh8 billion and leading to a tax liability assessment that found that Sh4 billion had been lost in the transfer-pricing racket. The culprits are expected to agree with KRA on a payment schedule that will enable them to clear the tax.

Multinational companies (MNCs) have been accused of devising complex transfer pricing mechanisms that enable them to cheat poor countries of tax revenues they need to improve the quality of life for their citizens.

(READ: Poor nations lose Sh94bn daily to tax cheats, says Oxfam)

Conservative estimates from the US-based international financial watchdog, Global Financial Integrity (GFI), have put Kenya’s transfer pricing-related tax losses in the past 10 years at Sh115 billion or Sh11.5 billion annually.

The amount is equivalent to what Kenya plans to spend on the payment of interest on foreign loans in the current financial year.

“Whatever financial regulations may be in place or may be contemplated have not yet had an effect on the continued passage of funds out of poorer countries, through the global shadow financial system, and ultimately into richer western economies,” says a recent GFI report.

Most of the money is lost through clever accounting involving intra-company deals that account for between 50 and 60 per cent of cross-border trade. Mr Njiraini said KRA would take advantage of the growing global consensus on prevention of tax avoidance to eliminate revenue leakage through transfer pricing. He was addressing an international taxation seminar at Strathmore University in Nairobi.

KRA joined the Global Forum on Transparency and the Exchange of Information for Tax Purposes in 2010 hoping to use the network to prevent revenue losses through misuse of accounting practices such as transfer pricing.