Fresh headache for KRA as firms move to tax havens

Fresh headache for KRA as firms move to tax havens
KRA Commissioner General John Njiraini
Supa Loaf, Kenya’s largest and most visible bread brand has gone offshore to Mauritius. While Kenyan households will still enjoy the firm’s products, the shift could significantly affect how much tax the firm’s parent company, Mini Group, will pay the Kenya Revenue Authority (KRA).

As Kenya struggles to plug a huge Budget deficit, with a possibility that income tax will be raised for salaried citizens, Mini Group has joined a long list of local and multinational companies that have established holding companies in lower-tax jurisdictions to lower their tax burden in Kenya.

In such an arrangement, the foreign firm that owns the brands would typically charge the local subsidiary some fee for the use of the brands.

In some cases, the parent company could determine how expenses and profits are booked in the different countries that the operations are spread in to minimise taxes.

Local firms such as Britam and Centum have ownership links with companies registered in Mauritius.

While there is nothing illegal with “tax planning”, as it is referred to by financial experts, the shift is presenting a fresh headache for KRA, which has a record revenue target of Sh1.18 trillion this year.

Revenue target

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Last week, KRA told private firms and tax experts in a forum that it was eyeing at least Sh50 billion more a year in collections from proposed transfer pricing guidelines.

A participant who attended the discussions told Business Beat that the new guidelines were expected to provide a boost to Kenya’s revenue collection from multinationals.

“KRA is developing its own database and would not depend on the transfer pricing policies of the individual firms,” said the source.

Specific proposals that were discussed include establishing a database of figures that would provide a guide on the pricing of goods and services in transactions between related parties.

For instance, how much Coca Cola charges Nairobi Bottlers for every 300ml bottle of soda would be public information and would be compared to what the world’s biggest soft drinks maker levies on a similar franchise holder in Brazil.

As it stands, there are local subsidiaries of multinationals that have an almost free hand in determining how much they should declare as costs, which affects how much corporate tax is levied.

KRA’s corporate tax target represents nearly 5 per cent of the revenue Commissioner General John Njiraini is expected to raise for the Government this financial year.

Tough measures

The stakeholders’ meeting followed a directive from Treasury Cabinet Secretary Henry Rotich — delivered during his Budget speech last month — to the revenue agency where he proposed tough measures to curb tax fraud by multinationals.

“To further deter the use of transfer pricing, I have proposed an amendment on the definition of permanent establishment to restrict transactions between related parties and their local establishments for tax purposes,” Mr Rotich told Parliament.

Transfer pricing is the distortion of rates at which goods and services — such as the use of brands — are transacted between related parties that would have the effect of understating the profits on which tax is charged.

Unilever Industries and Karuturi Flowers are two of the most prominent cases of transfer pricing in Kenya, with both firms ending up in court.

Many more cases are, however, resolved through arbitration between the companies and KRA, according to a senior auditor at Times Tower.

Oil marketers, banking institutions and flower companies have the worst records on abuse of transfer pricing, which Kenya is mostly helpless to crash.

Rotich was clear that multinationals operating in Kenya would have transactions between their various subsidiaries verified at market rates specified by KRA.

Previously, however, the pricing in such transactions was majorly determined by the companies themselves and is thought to have denied Kenya as much as Sh120 billion between 2001 and 2010.

Budget shortfalls

Dr Attiya Waris, a tax expert and lecturer at the University of Nairobi, said in a recent interview that revenues lost to multinationals through profit under-declaration are much higher than all grants and loans obtained from international lenders.

“Kenya would not need foreign aid and grants to plug Budget shortfalls if multinationals paid their fair taxes,” said Dr Waris, who has done extensive research on illicit financial flows.

Mr Philip Muema, the managing director of business advisory firm Nexus Group, agrees that the amount of lost revenue could be significant.

“Companies are here because they need to make profits, even if it means taking advantage of loopholes in the law — as long as they are not breaking any laws,” he said.

But KRA could explore innovative avenues to encourage compliance, such as lower tax rates for companies that offer full disclosure on related party transactions.

“It might be tough for KRA to beat multinationals because transfer pricing is not an exact science,” said Mr Muema, an auditor, adding that even companies operating in the same sector would have different policies on how their subsidiaries transact.

Urgent problem

Tax Justice Network Africa CEO Alvin Mosioma said KRA’s difficulties in dealing with transfer pricing are complicated by a lack of strong laws and comparables.

“It is an urgent problem that KRA must devise ways of handling if we expect to stop tax avoidance by big international companies.

“Acquiring comparables, however, for all the different sectors could be both difficult and costly,” he said.

Comparables are a set of figures that would show the indicative prices for commodities; say, how much a multinational flower company pays for a stem from its producing subsidiary.

Related parties

This is not the first time KRA is introducing amendments to income tax laws.

The first changes were brought in 2006 after the then commissioner for taxes lost a suit against Unilever. Amendments to the law were sought to clarify what qualified as related parties, which changed from the narrow definition of common ownership and shared directorships, to a broader meaning that included firms owned by relatives, whether through blood or marriage.

Supa Loaf confirmed the shift of the brand to Mauritius, but has yet to respond to our email enquiry that sought answers on the motives behind the move.

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