By Frankline Sunday
Kenya: Large corporations based in Kenya and high net worth individuals have taken advantage of the country’s convoluted and outdated tax regime to rob the government of an estimated Sh100 billion in three years.
While Kenya’s low and middle-class earners are struggling to comply with punitive taxes, the government has failed to scrap outdated tax holidays and incentives that cost billions of shillings each year that benefit big companies.
“Some of the incentives that are granted by the government do not translate to more foreign direct investment and if repealed will undoubtedly provide an increased revenue stream,” says Mr Alvin Mosioma, the director of Tax Justice Network Africa (TJNA), an organisation that monitors the economic viability of tax systems across Africa.
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Data from several economic studies between 2005 and 2008 and interviews with industry sources reveal how dodgy companies and wealthy individuals are exploiting tax loopholes to bleed the taxman billions of shillings in revenue each year.
Despite Kenya’s ambitious Sh1.6 trillion Budget for the 2013/2014 financial year, the Kenya Revenue Authority (KRA) is hard pressed to meet revenue targets.
The burden has instead fallen on Kenya’s middle and low-income earners.
Advocacy groups like Action Aid and TJNA, which have done extensive research into Kenya’s revenue loss, state that the tax loss figures are “conservative”. Even worse, much more is being siphoned out of the country through transfer pricing.
The massive gap in the revenue basket has been blamed on the existence of tax holidays and incentives, which remain despite calls for such tax laws to be scrapped.
Investors in the manufacturing and hotel sectors outside Nairobi and Mombasa, for example, are eligible for an investment allowance of 85 per cent on plants, machinery, buildings, and equipment.
Investments located in Nairobi and Mombasa are eligible for 35 per cent investment allowance. For manufacturers under bond, the applicable rate is 100 per cent for all locations.
Both the government and private sector acknowledge that the presence of incentives and allowances do not necessarily guarantee the flow of foreign direct investment (FDI) into the country.
Studies have shown that other countries in Africa without tax incentives attract more FDI than Kenya.
“Kenya has carried on with unnecessary incentives for far too long even after several studies have proved their ineffectiveness,” says Mosioma, director of TJNA.
John Mutua, the head of the Budget Information Programme at the Institute of Economic Affairs (IEA) agrees that Kenya stands to gain significantly more revenue if blanket tax holidays and exemptions are removed.
“Tax exemption regimes create manipulations in the system because some multinational companies that enjoy tax holidays for a number of years often change their names after the time has lapsed or move to another country. Kenya loses out on the tax,” he says.
This gives the firm the ability to enjoy perpetual tax breaks that could go on for several decades whilst remitting little or no tax to the exchequer.
Still, it appears that Kenya’s problem of illicit financial flows runs deeper than financial authorities would like to admit.
Tax planning – an accounting term that basically means strategically reducing one’s tax expenses – is steadily gaining currency in corporate Kenya.
Although mostly legal, several grey areas exist and are worsened by Kenya’s opaque and convoluted fiscal laws that allow corporations to dodge paying billions in taxes each year.
Sarah Muyonga, a policy and advocacy manager at the TJNA reveals that some firms collude with shady banking officials and auditors to manipulate their accounts so that they can continue to enjoy the tax holidays provided by these laws.
“There have been cases of firms reporting losses in Kenya for several years on end whilst hiding their profits in administrative fees and asset transfers,” she says.
However, the vice is not only unique to multinational companies, as local firms have also joined the bandwagon.
KRA is trying to play catch-up with tax cheats – both local and multinational – by banking on technology.
Last week, KRA announced it would soon set up a system allowing whistle-blowers to anonymously report tax evasion.
This came after the launch of i-Tax, an electronic tax filing system that allows the taxman to aggregate financial data from taxpayers. i-Tax will be linked to commercial banks and property data banks to set up a reservoir of personal financial data on taxpayers.
In the event that a taxpayer fails to declare income from a particular source, the transaction may be picked up by the bank and flagged by KRA.
However, that is easier said than done. Such systems take time before they can begin to yield fruit. In addition, commercial banks are always wary of dealing with financial authorities due to perceived bureaucracy. Information sharing across the divide is very slow.
In the meantime, tax evaders manage to remain one step ahead by using services of well-heeled lawyers and auditors.
CPA Clyde Mutsotso of Clyde and Associates says that the practice of using aggressive tax planning is rampant in Kenya and companies are looking for all means to cut their tax expenses.
“We have companies which are founded in Kenya, operate in Kenya and sell their products and services in Kenya,” he says. “However, the same companies have shell companies registered in tax havens where the profits are shifted and Kenya loses out on revenue.”
KRA often takes corporations to court on counts of tax evasion but the companies are famous for using strong legal departments to tie up cases in protracted litigation battles that can stretch for up to 10 years.