Coca-Cola, EABL fight new excise tax demand

Corporate News

Soft drinks maker Coca-Cola will close shop and relocate its manufacturing plants to neighbouring countries if the taxman insists on implementing a Sh17.7 billion digital tax system. PHOTO | FILE 

By EDWIN MUTAI, emutai@ke.nationmedia.com

In Summary

• Coca-Cola and EABL said that although they have been forced to spend billions of shillings on the EGMS system, their plants only needed simple reconfiguration to give KRA what they wanted at no cost.
• Mr Kiniti said that although the wines and spirits markets had gained some benefits arising from reduced cases of counterfeiting, there has been no significant change in the beer and spirits markets where EGMS has caused a 46 per cent rise in excise tax burden and a drop in demand.

Soft drinks maker Coca-Cola will close shop and relocate its manufacturing plants to neighbouring countries if the taxman insists on implementing a Sh17.7 billion digital tax system that industrialists have opposed, the company’s officials told Parliament.

Coca-Cola said its opposition was hinged on the fact that the system would force it to part with between Sh8 billion and Sh11 billion annually based on the Sh1.50 stamp duty it is meant to impose on every bottle of water, juice and soda.

Beer maker EABL took a similar position, saying it has spent more than Sh1 billion to modify its four production lines and would look for tax-friendly locations to set up its manufacturing plant if the new tax system is enforced.

Coca-Cola estimates that it would require up to Sh1.4 billion to modify its production lines in Kenya besides the huge annual costs involved.

“We have not piloted the EGMS, but our analysis shows Sh1.4 billion will be needed to install the system across the 13 production lines,” said Selena Achieng Olende, the Coca-Cola public affairs and communications manager at Nairobi Bottlers Limited.

Coca-Cola produces between 130,000 and 150,000 bottles per hour meaning that the company will pay an average of Sh5.4 million daily to the Swiss firm that has been hired to manage new tax system adding up to a whopping Sh7.3 billion annually.

“The Coca-Cola contract alone would earn SICPA 7.3 billion per year from the six production lines. If you are to compute for EABL, British American Tobacco among others, somebody would have collected trillions of shillings from our economy,” said Adan Keynan, the chairman of the National Assembly’s Public Investments.

Committee (PIC)

EABL officials told Parliament that the Kenya Revenue Authority has already sent it a Sh300 million stamp duty bill arising from use of the Excisable Goods Management System (EGMS).

Eric Kiniti, the EABL corporate affairs director, told the PIC that the demand note from the Swiss firm SICPA Security SA covers the seven months to September this year following installation of the EGMS system as directed by KRA.

EABL said it started using the EGMS on February 2 when the law requiring all beers to bear e-tax stamps came into effect. The Treasury, through legal notice Number 110 of June 2013 expanded the application of EGMS revenue stamps from cigarettes, wines and spirits to water, fruit juice and soda.

Mr Kiniti said EABL spent more than Sh1 billion to install the EGMS system and has been taking losses amounting to Sh77 million since it started using it due to “a lot of down time arising from frequent machine failures.”

“We spent more than Sh1 billion to install the system and have lost Sh77 million in downtime for the seven months we have been using EGMS,” Mr Kiniti said.

EABL has four packaging lines with each producing 4,000 bottles per hour.

Mr Kiniti said most of the breakdowns are caused by incompatibility problems arising from the fact that SICPA is not the original line manufacturer.
Kenya Association of Manufacturers chief executive Phyllis Wakiaga said the downtimes at EABL become particularly severe when there is a power outage because the EGMS is usually the last system to start up – often taking an hour or two to get back operation.

“The EGMS system has led to reduced line speeds at EABL, especially on the ready- to- drink products by up to 30 per cent. This has led to a loss in production efficiency and is affecting the bottom lines of the company,” Ms Wakiaga said, adding that KRA has not been forthcoming on who should bear the costs.

Coca-Cola and EABL said that although they have been forced to spend billions of shillings on the EGMS system, their plants only needed simple reconfiguration to give KRA what they wanted at no cost.

“Coca- Cola, like Diageo or EABL beer products, are very difficult to counterfeit. We don’t know why we were brought under the Legal Notice 110 and the regulations. We asked the Treasury and KRA to hold meetings with us to address our concerns, but their representative did not attend 10 meetings that KAM held on the matter,” Ms Olende said.

Counterfeiting problem

Coca-Cola also wants the tax charged on its branded mineral water Dasani to be capped at not more than 20 cents while juices should pay the tax at a maximum of 11 cents, arguing that the Sh1.50 risks driving them out of business and lead to massive job losses.

EABL said it has never had a counterfeiting problem on beer and that the price of Sh1.50 was never disclosed to it when it installed the EGMS.

“It came in after we tried to pilot the project at our own cost. We had to change our lines and do a lot of configurations. We spent about Sh500 million to reconfigure the lines,” Mr Kiniti said, adding that the EGMS has had no effect on beer taxes because it caused a rise in excise duty occasioning a drop in revenue and sales.

READ: Beer farmers spared as MPs retain tax breaks

Mr Kiniti said that although the wines and spirits markets had gained some benefits arising from reduced cases of counterfeiting, there has been no significant change in the beer and spirits markets where EGMS has caused a 46 per cent rise in excise tax burden and a drop in demand.

Coca-Cola said it had a 28 per cent rise in product pricing under the new tax system, leading to a significant fall in sales volumes. KAM is demanding that KRA stops application of the system until solutions to all policy and technical issues are found and implemented to the satisfaction of the affected firms.

PIC yesterday took the KRA tender committee led by Ms Alice Awour to task to explain how SICPA was procured. Ms Grace Murichu, the head of procurement, said there was no feasibility study and due diligence conducted before the Swiss firm was awarded the multi- billion shillings five- year contract.

The Treasury has since asked KRA not to implement the EGMS on bottled water, juice and soft drinks until a stamp pricing model is agreed to with manufacturers

emutai@ke.nationmedia.com