Politics and policy
Taxpayers outside KRA headquarters in Nairobi. The taxman will take
advantage of the growing global consensus on prevention of tax avoidance
to eliminate revenue leakage through transfer pricing. Photo/FILE
By GERALD ANDAE, gandae@ke.nationmedia.com
In Summary
- Several multinationals had used the transfer pricing mechanism to declare losses, which effectively disqualified them from paying income tax.
- But a KRA audit of 40 conglomerates discovered widespread abuse of transfer pricing – which refers to prices charged when one unit of a multinational group buys or sells product from another part of the same group but in a different country.
- The culprits are expected to agree with KRA on a payment schedule that will enable them to clear the tax.
A Kenya Revenue Authority (KRA) audit has forced a
number multinationals to rewrite their financial statements, turning
losses into profits in a review that has yielded Sh25 billion in tax
revenues.
The companies had used transfer pricing to declare losses, which effectively disqualified them from paying income tax.
But a KRA audit of 40 conglomerates discovered
widespread abuse of rules that allow deductions of the prices charged
when one unit of a multinational group buys or sells product from
another part of the same group but in a different country.
The prices charged impact their level of profits and multinationals have used the accounting tool to legally dodge some income taxes by lowering earnings or declaring losses -- on paper only.
The prices charged impact their level of profits and multinationals have used the accounting tool to legally dodge some income taxes by lowering earnings or declaring losses -- on paper only.
“We have carried out over 50 transfer pricing
audits with a total tax yield in excess of Sh25 billion whose collection
is in various stages of enforcement,” said KRA commissioner-general
John Njiraini on Friday.
“A significant proportion of the audit effort has
seen the claw back of loss positions accumulated by the companies,
meaning that these corporates are now in tax payment positions in
respect of their future operations,” he added. He was addressing an
international taxation seminar at the University in Nairobi hosted by
the African
International Business and Management (AIBUMA). The
taxman did not mention the period the audit covered, but said it
started with the creation of a dedicated team to track the
multinationals after 2009. The identity of the multinationals was also
not revealed.
The culprits are expected to agree with KRA on a
payment schedule that will enable them to clear the tax. The
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.
For instance, some 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.
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 half the budget Kenya
has allocated to 47 counties in the current financial year to tackle
unemployment, the broken health system and to revamp infrastructure.
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.
KRA joined the Global Forum on Transparency and the
Exchange of Information for Tax Purposes in 2010 hoping to use the
network to intensify its fight against transfer pricing.
“We have signed tax information exchange agreements
with seven jurisdictions while others are at various stages of
negotiation,” said Mr Njiraini.
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