Hundreds of trucks line up on the dusty entrance to Roto Moulders every day waiting for their turn to pick up already paid for plastic tanks for delivery, as part of a much longer 15, 000 kilometre-journey of profits to Dubai, Mauritius and back. It is a very busy factory, just off Nairobi's Enterprise Road, that manufactures more than 500 tanks a day of varying capacities of anywhere up to 24,000 litres which sells at Sh300,000 apiece.
Most of the workers here however take home more in a month than this multi-billion shilling business has done in five years, going by its declared profits (losses) and the corporation tax paid to the Kenya Revenue Authority.
The plastic manufacturing business is not nearly as profitable due to the volatility of crude oil prices, managing director Heril Bangera told the Standard in recent interview. Roto Tanks is one of the biggest plastic tank makers -if not the biggest-with a market share of about '23 per cent', he disclosed. In fact, 2011 and 2012 were its best trading year to date when it paid Sh10, 000 as corporation tax in a cash transfer made in November 2013, according to confidential documents that we have copies of, indicating that its profit before tax in that year was Sh30, 000. Most of the other amounts that have been paid to the KRA are in penalties for late filing of returns.
Mr Bangera however could not disclose what the sales volumes then were, as that was confidential information that he would be glad to keep away from competitors. Most periods since then have been worse and the firm is unable to remit any cash as income tax - because it did not make any. An employee earning a salary a monthly salary of Sh15, 000, just above the minimum wage, has paid about Sh35,000 in income tax in five years.
A 10-metre-long wall separates the manufacturing plant from the sprawling Mukuru kwa Njenga slums where the poorest demographics of the city live, with limited access to most basic needs, such as water and housing.
Government services are largely non-existent, partly because the State cannot afford to provide for its most vulnerable populations.
Competing national needs — such as investments in energy and infrastructure as long-term plans to attract investments to create badly needed jobs — place the otherwise more urgent demands of social protection for the poor on the back burner. The Government gets most of its money from taxes.
Roto Moulders, set up 25 years ago, is the flagship subsidiary of Flame Tree Group (FTG), which Bangera brought to the Nairobi Securities Exchange (NSE) late last year.
In his estimation then, it was worth Sh2 billion. FTG employs a majority of the 1,000 workers who provide labour for Roto and four other much smaller businesses.
Jojo Plastics is an off-shoot of the business and was established in the past two years. It makes an alternative water tank brand, and is yet to pay any taxes of its own — except for consumption and value added taxes, which are borne by end buyers.
The two and another sister firm also manufacture other plastic products, such as biodigesters, mobile toilets and guard houses.
In Dubai, FTG has a wholly-owned trading subsidiary with only two employees called Cirrus International FZC, which deals in the trading of polymers, the raw material for the manufacture of plastics that is extracted from crude oil.
The Dubai-based firm trades all over the world, and sources for some of the raw materials for the African manufacturing businesses, “but not all of the inputs”, the MD is quick to add.
Assuming that the transaction is at arm’s length, the United Arab Emirates (UAE) firm can still make a profit, however small, from selling raw materials to its loss-making African sister companies.
Bangera said Cirrus International was able to generate Sh166 million in net profits last year, which helped negate the impact of FTG’s loss-making businesses in Kenya, Rwanda, Ethiopia and Mozambique.
“We can’t give you a breakdown of the operations country by country,” Bangera said during the interview at Standard Group offices last month.
He said his firm could run Cirrus independently of the manufacturing divisions as it was very profitable, but chose to bundle it in because FTG had a vision of becoming the Kenyan version of Unilever — one of the world’s largest conglomerates, whose products from food to personal care are used by two billion people across the globe every day.
COMPLEX STRUCTURES
Collectively, the manufacturing businesses, which also produce lotions among other products across the four countries, booked losses of Sh21.7 million in their last financial year, according to the firm’s annual report.
FTG’s net gains, after it consolidates the profits and losses from its subsidiaries, are sent 5,068 kilometres to its head offices on the 12th floor of a brightly painted office block in Port Louis, Mauritius.
The address of the head office belongs to Juristax, an offshore management firm that also hosts the corporate offices of tens of other big companies, on paper.
“We could have chosen any of the other countries to host our head offices, but settled on Mauritius because it has double taxation agreements with most of the jurisdictions we have operations in,” said the MD.
His external public relations manager, Matthew Ward, added that Mauritius’ judicial systems were superior, which could come in handy in the eventuality of a dispute that would require resolution before judges.
In a previous phone interview, Mr Ward had said it was normal for manufacturing firms in Africa to have trading subsidiaries in other jurisdictions, justifying the structure of FTG.
Both the UAE and Mauritius have very friendly taxation regimes on profits made by corporations, as well as on capital gains.
The applicable tax rate on profits in the UAE is zero, meaning companies keep all the money made, while Mauritius taxes profits at an attractive rate of 3 per cent.
Kenya, on the other hand, levies corporation taxes at 30 per cent and withholding tax on dividends at 5 per cent.
That means KRA collects about a third of pre-tax profits for firms operating in Kenya, and only 5 per cent for subsidiaries of multinational corporations remitting dividends to their parent companies.
The tax differentials have pushed firms to employ complex structures to depress their tax liabilities or even eliminate them completely.
While the tax planning structures are legal, they have been cited as an avenue through which Africa could be losing trillions of shillings a year.
For instance, the continent lost more in unpaid taxes last year than the collective cost of its infrastructure budgets, top UN official and former Trade minister Mukhisa Kituyi said in an interview with Business Beat.
A study by the United National Conference on Trade and Development (UNCTAD), where Dr Kituyi is secretary general, found that Africa’s 55 countries planned to spend $93 billion (Sh9.8 trillion) on roads and related works, against $100 billion (Sh10.5 trillion) in profits that were shipped out by multinational companies.
He said African countries, including Kenya, received far less in Foreign Direct Investment (FDI) than they lost to firms from developed countries.
The UNCTAD study showed Africa received $52 billion (Sh5.5 trillion) in FDIs last year, but lost double this amount in investment-related tax haemorrhage.
“Only a radical change in taxation policies could pull poor nations like Kenya from poverty. A major principle has to be changed to force companies to pay most of their taxes in countries where the operations are based,” Kituyi said.
He added that companies should be forced to pay the highest taxes in jurisdictions where the most value in their operations is generated.
“If they [multinational firms] make their money from exporting tea from Kenya, then the highest taxes should be paid in Kenya, and not where firms choose,” he said.
An upcoming meeting of the World Trade Organisation (WTO) is scheduled for December in Nairobi, and is hoped to help in eliminating barriers to international commerce.
Kenya would, for instance, be pushing for greater market access for its agricultural produce, including horticulture, coffee and tea.
Firms use tax avoidance measures, technically known as profit shifting and base erosion, to depress revenues in the developing countries where most of the production takes place.
Taxes that would otherwise be payable in the poor nations are lost in arrangements, which are now subject to hundreds of legal suits between the firms and local agencies like KRA.
There is no specific data on Kenya, but various studies have put the figure at Sh100 billion. This is nearly half the amount collected in income tax by companies last year.
TAX HAVENS
Companies use aggressive tax planning mechanisms, “which should be criminalised”, Kituyi said, to ensure their taxes are paid in the jurisdiction of their choice, even though some subsidiaries have not contributed to the value chain.
“They would prefer to pay in countries with low tax regimes, which are often tiny islands,” he said.
Treasury Cabinet Secretary Henry Rotich additionally told Business Beat that companies were not paying up their fair share of taxes, while a majority have reported losses for more than 10 years, but still remain in operation.
“To us, this is purely tax evasion,” said Mr Rotich, adding, “you would expect that they would close down if they cannot make any profits over such a long time.”
Often, the low tax jurisdictions, also known as tax havens, do not levy corporation taxes and are, therefore, attractive destinations for wealth created by individuals and corporations elsewhere.
One of the most popular arrangements involves shifting corporate and marketing offices to such countries.
The value of services offered from the subsidiaries domiciled in the tax havens are often complex to quantify, even though significant amounts are paid for them, complicating the trail of money flows.
Global debate is now growing on the role of these low-tax jurisdictions in tax avoidance in both developed and developing nations.
Individual workers contribute more than two-thirds of income tax collected annually, outperfoming their employers, partly because they are easier targets whose salaries are chopped at source and passed on to KRA. Workers are taxed at a graduated rate of between 10 and 30 per cent, depending on their income.
Almost always, workers pay a much higher tax than their employers, making the case for companies to pay up and contribute to society’s well-being.
Bangera said his firms always aspire to be the best corporate citizens in the jurisdictions they operate in.
In the year ending December 2014, the firm paid just over Sh122 million as dividends from its Mauritius head offices to shareholders, most of them in Nairobi, some 3,100 kilometres from Port Louis.
In the same period, the parent company, FTG, paid Sh8 million in taxes, according to company filings. Bangera said he could not break down how the taxes were shared between Kenya, Rwanda, Ethiopia, Mauritius and Mozambique.
HUGELY SUCCESSFUL
However, since FTG is a Mauritian firm, it may have paid over Sh4 million at its headquarters, based on the 3 per cent tax rate levied on the profits generated by the subsidiaries, including Roto Moulders.
From this math, the remaining Sh4 million would be shared between the four African countries.
Bangera, who is a hugely successful businessman by any measure, has built his multi-billion-shilling business, which has now diversified into making snacks and hair products, from scratch.
The long history of the now-listed firm dates back to 1989 when the first plastic tank rolled off the mould. It has since been one success after another.
KRA does not comment about individual taxpayers, but an official Business Beat spoke to said any firms that raise tax concerns are usually investigated through audits.
One of the most prominent cases of tax avoidance in Kenya’s history relates to Karuturi, a flower grower, which produced roses in Naivasha before they were sold to a Dubai-based sister firm as a very low price, and then sold on in European markets.
The flowers were, however, not transported through Dubai, but were sold directly to buyers in European capitals from the Naivasha farms.
mmichira@standardmedia.co.ke
