KRA boss takes on expert on legality of tax avoidance

Kenya Revenue Authority (KRA) workers take part in a procession to create awareness to members of the public on paying tax as the KRA Tax month started country-wide, September 03, 2016. The procession started was flagged off at the County Commissioner's office and went through Nkrumah road and ended at the KRA's Forodha House where the celebrations were held. [PHOTO BY GIDEON MAUNDU/STANDARD].

Kenya Revenue Authority Commissioner General John Njiraini has differed sharply with a prominent tax expert on the legality of tax avoidance.

During a tax summit in Nairobi last week, Mr Njiraini disagreed with claims from a fellow panelist that tax avoidance was not illegal.

The commissioner general said some multinational corporations use this loophole to fleece the country by engaging in “abusive tax planning”.

Tax planning, an accounting term that basically means strategically reducing one’s tax expenses, has been gaining currency in corporate Kenya.

It has seen companies that are founded in Kenya, operate in the country and sell products locally register shell companies in tax havens where all profits are shifted, which means Kenya loses out on revenue.

IMMORAL, NOT ILLEGAL

Njiraini explained that through abusive tax planning, small businesses, such as “kiosks”, have shouldered the heaviest tax burden as huge multinationals escape the taxman’s noose.

The KRA boss was responding to sentiments from Nikhil Hira, a tax partner at audit firm Deloitte, who had said although tax avoidance is immoral, it is not illegal. Mr Hira added that with tax avoidance, the taxpayer is using the law not to pay more taxes.

The issue of tax avoidance is a global issue. It hit international headlines most recently after the release of Panama papers that show a lot of rich politicians have stowed their money in countries with secretive offshore tax regimes.

The US’ Republican presidential candidate, Donald Trump, was also found to have used a loss of $916 million (Sh90.1 billion at current rates) in 1995 to avoid paying personal federal income taxes for years, a classic example of tax avoidance.

Kenya has been keen on finding ways to avoid losing billions of shillings in revenues as big businesses take advantage of loopholes in tax laws.

According to Patrick Chege, a manager in charge of transfer pricing audits at KRA, Kenya is the first country in Africa to explicitly criminalise tax avoidance schemes, which it has done through the Tax Procedure Act.

“If the commissioner has applied a tax avoidance provision in assessing a taxpayer, the taxpayer is liable for a tax avoidance penalty equal to double the amount of the tax avoided,” according to the Act.

But implementing the law has been a challenge, as tax avoidance is normally an international issue.

TAX HOLIDAYS

Mr Chege noted that although countries outside the developed economies of the G20 can give their views on international taxation issues, their ideas are not always considered. This has disadvantaged many developing nations, including Kenya.

“We should be able to tax a company operating in Kenya even if its level of activity is very low,” said Chege.

Between 2005 and 2008, Kenya is thought to have lost more than Sh100 billion in outdated tax holidays and incentives, even as the country struggled to raise the money required to finance development projects.

The incentives the country offers include a 10-year tax holiday for enterprises in export-processing zones, as well as a 100 per cent investment deduction on hotel buildings, and on buildings and machinery used in manufacturing. Further, manufacturing investment in buildings and machinery in towns near Nairobi, Mombasa or Kisumu attracts an investment allowance of 150 per cent.