Nairobi’s tax shelter status booming as firms flee tough laws

By MARK KAPCHANGA

Kenya is in the spot of bother with revelations that the country could be hosting innumerable firms with billions’ worth of questionable deals.

While Kenya has recently been cashing in on international flows that have highlighted Nairobi’s growing profile as Africa’s financial hub, experts say powerful corporations are using the region as a shelter for their illicit businesses.

Findings in Africa Progress Report 2013: Equity in Extractives note that the country’s capital is gradually growing into a tax haven, which allows companies to transfer profits between jurisdictions and reduce their tax bills.

According to the report, Kenya could be accommodating an assortment of instruments ranging from international banking and insurance to the structured investment vehicles that were at the core of the 2008/2009 global financial crisis. But in a rejoinder to the growing fears, the Chief Executive Officer of the Kenya Bankers Association Habil Olaka says the country is yet to create a tax environment that would attract more foreign investments.

“If Nairobi is to compete effectively with Mauritius for international inflows, then it should be made a low tax jurisdiction,” said Mr Olaka.

The report reveals an intricate system in which firms use their Kenyan operations to evade taxes through hiding their income, shifting their taxable income as well as receiving and depositing income in accounts in Nairobi without declaring it in the home country.

shadowy owners

In a calculated move to evade tax authorities, these firms make payments to these ‘subsidiaries’ for non-existent services or purchases, whose price is exaggerated in what is known as aggressive transfer pricing, to shift taxable income to the tax haven — finding that KRA was not willing to comment on.

In the US, for example, around 732 companies trading on the stock exchanges are incorporated in the Cayman Islands, a British Overseas Territory in the western Caribbean Sea known for its attractive taxes and secrecy.

It is this secrecy that has made Nairobi eye-catching. Nearly all firms listed at the Nairobi Securities Exchange have shadowy owners in what is what is also referred to as nominee shareholders. According to the report, this environment that does not call for full disclosure concerning main owners, shareholders, directors and company accounts has seen tax cheat prime their sights on Kenya. Situated strategically between Europe, Africa and to some degree, the Middle East, Kenya provides overseas businesses with a relatively efficient ports infrastructure.

The country’s fairly developed infrastructure puts it at a better position than other established and developing offshore centres such as Botswana, Ghana, Mauritius, Djibouti, Morocco, Liberia and Tunisia.

“The first case in Africa was when Ghana government and Barclays Bank tried to create a tax haven but failed. Botswana tried it later but the harsh anti-money laundering legislations nipped the vice in its bud. Now, we are seeing an emerging trend in Kenya,” said Alvin Mosioma, the Director of Tax Justice Network-Africa. He said the model being adopted in the country is similar to that of the United Arab Emirates, where the term ‘international financial centre’ is tactically used for tax haven.

It is not a coincidence that these nations are being fronted as tax havens. The move is linked to the discovery of natural resources. Ghana, for example, was spotted due to its vast natural resources as well as abundant oil in the neighbouring Nigeria.

It seems Kenya’s case in no different. The discovery of oil in Turkana and Northern Uganda and gas in Mozambique and Tanzania are likely to aid the flows undetected.

But it seems it will not be all gloomy. University of Nairobi lecturer XN Iraki says creation of a tax haven in Kenya would not only improve the country’s infrastructure but also create jobs and lift Nairobi’s image as a business hub.

“The only danger is that it can be abused if proper regulations are not in place,” said Dr Iraki.

Fredrick Omondi, Partner at Deloitte & Touche, says tax havens could promote tax evasion and money laundering, thereby inviting unnecessary attention and potential sanctions on the country. Omondi, however, says information sharing across different tax regimes and proper regulations could minimise misuse of tax havens. “The Government should streamline the economy across the board instead of creating special zones that will create a gap in the market resulting to a further weakening of the economy,” said Mr Mosioma.

According to the International Monetary Fund (IMF), such countries attract huge financial flows, which often end up exceeding the size of host economies. Unfortunately, these tax havens are often used as conduits for tax avoidance that end up increasing poverty in developing countries.

“Host countries see such activities as a source of growth and a legitimate area for economic diversification. For critics, these regions are a stark reflection of tax evasion and money laundering triggered by the lack of transparency and regulation that comes with unfettered globalisation,” said María González, an economist at the IMF.

illicit capital flows

A recent investigation led by former United Nations Secretary General Kofi Annan showed that through tax havens, Africa loses about $38 billion (Sh3.2 trillion) a year. This is about 40 per cent of the total amount of international development aid to the continent. Annan’s Africa Progress Report said the continent is essentially losing capital as well as funding development elsewhere, a move that has made it depend on foreign aid.

The report revealed mining deals involving two FTSE100 multinationals, which had denied the Democratic Republic of Congo an estimated $1.36 billion, about 200 per cent of the country’s education and health budgets combined. “Africa loses twice as much in illicit financial outflows as it receives in international aid,” said Annan. “It is unconscionable that some companies, often supported by dishonest officials, are using unethical tax avoidance, transfer pricing and anonymous company ownership to maximise their profits, while millions of Africans go without adequate nutrition, health and education.”

The gravity of the matter has seen Europe expend a lot of effort in fighting the illicit capital flows, especially due to the role they played in exacerbating the global financial crisis. This explains why the issue top on the agenda of the G8 summit that started in June 17 in Northern Ireland.

While discounting the fears that Kenya may be becoming a tax haven, EU Head of Delegation in Nairobi, Lodewijk Briet said the increasing tax appetite in Europe could, however, be forcing more tax cheats to hibernate to countries considered less stringent. “The appetite of the tax authorities in Europe has grown exponentially and increasing information sharing between tax authorities is making Africa a more attractive destination for hiding funds,” Briet said.

Like a cancer, the vice is insidious and often hard to check against. Mosioma says the complexity of the subject means it cannot be addressed at the national level but through international legislation and automatic exchange of tax information. Today, it is only through a bilateral agreement that such information can be shared. Worse is the fact that the threshold put to pursue such an avenue is strenuous, time consuming and very expensive.

This means by the time a country is done with an investigation, the funds would already have been moved to a new jurisdiction. But UK Prime Minister David Cameron has pledged that G8 will seek to maintain the momentum generated by the G20 on information exchange and the strengthening of international tax standards.

He said the Summit will look to go further on tax havens by improving the quality and quantity of tax information exchange. “We will work with developing countries to help them improve their ability to collect the tax that is due to them too,” said Mr Cameron. According to Mr Mosioma, the illicit capital flows could also be checked through a mechanism of registry of companies where beneficial owners of the questionable entities can be traced.

“More importantly, the International Financial Reporting Standards should be reformed so as to compel firms to report their operations on a country by country basis instead of just consolidating their results,” he said. The US and France have already adopted a similar plan.