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Zuku’s taxing question: Owners plead for court protection from eye-watering KRA bill

By Moses Michira | August 16th 2016 at 00:00:00 GMT +0300

PHOTO: COURTESY

Owners of the popular Zuku brand are locked in a duel with the taxman over a Sh3.4 billion tax bill.

The battle, which relates to Zuku’s sister companies in Mauritius, may redefine taxation guidelines for multinational firms operating in Kenya.

The United States government, through the Overseas Private Investment Corporation, United Kingdom-based Helios and private firms from Belgium and Netherlands are among the shareholders of Wananchi Group, which provides Internet and pay television, among other services.

At the heart of the conflict is a request the firm filed with the Kenya Revenue Authority (KRA) to carry forward losses it had made for the purposes of tax computation.

Kenyan law allows for a rollover of losses for up to 10 years, an incentive granted to investors to encourage foreign direct investments and job creation.

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But according to court documents, KRA claims to have established that the firm’s Nairobi-based subsidiaries have been making payments to Mauritian sister firms that exist only on paper, and for services that were actually offered by employees based at its Ngong Road offices.

“It is instructive to note that during the audit period, you actively participated in the affairs of WGHL, WPL and WSL in conjunction with other resident employees,” KRA told the firm after carrying out a tax audit for the period from 2010 to 2013.

Wananchi Group Holdings Ltd (WGHL) is the holding company for the Wananchi Group, with registered offices at Trident Trust Company — a global offshore services firm that has offices in two dozen jurisdictions, including Panama, Jersey and the British Virgin Islands.

Two other subsidiaries, Wananchi Satellite Ltd (WSL) and Wananchi Programming Ltd (WPL), are also registered at the same address.

Despite the offshore registration, KRA says the firms are centrally managed and controlled in Kenya, forming the basis of the argument that the subsidiaries are, for all intents and purposes, Kenyan.

Final decisions

Ordinarily, the place where a company is centrally managed and controlled is the location where the final decisions that bind the company are made.

“Accordingly, a company cannot assert that it is tax resident outside Kenya simply by virtue of being incorporated outside Kenya,” says the taxman in court papers.

Trident Trust is the world’s biggest provider of offshore services and helped in the registration of the three companies in the tiny Indian Ocean island jurisdiction.

“Contracts between WGHL, WPL and WSL with third parties or related parties are all signed by personnel in Kenya.

The management of affairs for these companies were ran by personnel who were all resident in Kenya,” KRA said in correspondence with the Wananchi’s management, which was filed in court.

Among the personnel alluded to are former group chief executive and founder Richard Bell, Euan Fannel, Mohamed Janeby and Hannelie Bekker. Ms Bekker is the managing director of WPL and, together with her team based in Nairobi, is claimed to be developing custom channels for Zuku.

 

“Her team in Kenya also handled editorial work from channel concept to development, determining programme mix, scheduling, programme acquisition, commissioning, production promos and other on-air elements through to transmission scheduling,” reads a letter authored by a KRA senior officer, PN Chege, from the agency’s Large Taxpayers Office.

One of her team’s senior workers is Caroline Wangechi Murage, who is alleged to be working in Nairobi as the head of business development for WPL — a Mauritius subsidiary.

In the submissions before the court, KRA further names Rachel Wariko as the brand manager at Wananchi Satellite, and who is also based in Nairobi.

The Kenyan business makes payments to the offshore firms in transactions that have come under sharp scrutiny as KRA battles to meet record revenue collection targets.

In one finding on reporting inconsistencies, according to KRA, WPL does not have any revenues on its books, although there are accounts for cost of sales.

Several transactions were found between the firms, which formed the basis of the queries raised by the taxman. It is through these payments, KRA argues, that the Wananchi group of companies was able to ship out billions, through avenues that include interest payments on shareholder loans, which qualify for taxation.

In effect, such payments diminish the profitability of operations in Kenya where taxes are much steeper than in Mauritius, which is widely considered a tax haven.

KRA’s assessment of the Internet and pay-TV services provider relates to audits carried out in the four years to 2013. The tax arrears claimed by the revenue agency include withholding tax worth Sh1.98 billion, value-added tax worth Sh1.1 billion and income taxes worth Sh267 million for a total of Sh3.37 billion.

KRA has submitted that offshore subsidiaries of the Wananchi Group are resident in Kenya for tax purposes, even though they are registered in Mauritius, citing that their operations and staff are based in Nairobi.

The response

In its response in court, however, Wananchi has contested these amounts and attached documentation it says shows the Kenyan unit does not owe KRA the amounts demanded. The firm additionally told the taxman that its various subsidiaries are distinct and should be assessed separately.

“While WGKL, and the above three companies are members of the same multinational group, they are distinct legal entities and correspondence relating to their tax stats should be addressed directly to the directors of the respective entities for action,” said Simon Hermengildo, Wananchi’s group chief financial officer.

In practice, companies are treated as separate legal entities even when they have common ownership. It is on the basis of this argument that the Kenyan-based management of Wananchi says the taxman should pursue any claims on the offshore companies at Port Louis, Mauritius, where they are registered.

The court papers indicate the audit carried out by the transfer pricing unit of the KRA identified the unpaid amounts, which the taxman sought to start recovering by appointing a director as the tax agent.

A person appointed as a tax representative of a taxpayer, whether an individual or company, is responsible for submitting returns and the actual payment of the taxes.

Mr Bell, a director in the Wananchi subsidiaries, has sought to block KRA from appointing him the tax agent.

“Please note that I am not in possession of any income or assets of any of the companies referred to you in your letter,” he told KRA in his objection to being appointed a tax representative of the three offshore companies.

In one of the letters to KRA that is before the court, he says he could only talk about the Kenyan business where he was managing director at some point.

In having him be the tax agent representing the companies, Bell would take responsibility for the various companies in Nairobi and Mauritius.

But minutes captured from a meeting held between Wananchi’s management, its lawyers, external auditors from KPMG and KRA officials indicate that Bell said he could not comment on the offshore subsidiaries.

“He clarified that he has a fiduciary responsibility to each of the many companies that he is a director of separately, and further that he does not have any routine managerial role in any of the group companies that KRA was requesting information on,” read the minutes in part.

Bell is reported to have told KRA officials to directly contact the offshore companies, and even went on to give them their addresses.

“I did indicate that I am a director of very many companies where I have a fiduciary responsibility to each of the many companies that I was a director of separately,” Bell told KRA in a June 2016 letter that is among the exhibits provided in court.

Aside from being the vice chairman of Wananchi Group Holdings, Bell is also the CEO of East Africa Capital Partners, a private equity firm, and Kooba, a data carrier.

He added that he appreciates KRA’s mandate to collect tax, but in the same light, “I expect that KRA will respect my rights as enshrined under the Constitution.”

Legal action

In the June letter to KRA, he threatened to take legal action, and has actually moved to court seeking the revocation of his appointment as the tax representative for the offshore companies. On July 12, Bell moved to the High Court in Nairobi, Judicial Review Division, seeking to quash KRA’s decisions.

“The applicant [Bell] herein be granted leave to apply for a Declaration that the Respondent [KRA] in appointing the applicant as the tax representative of the companies and therefore seeking to enforce the Default Pre-Assessment Notice for period 2010-2013 against the Companies through the Applicant has abrogated the Applicant’s right to a fair administrative action ...” read the pleadings in part.

Bell, in the petition filed by his advocates Coulson Harney, also wants the court to quash the Sh3.4 billion tax claim and bar KRA from taking any action to recover it from the serial entrepreneur.

He says in his affidavit that he is only a director of Wananchi Group Kenya Ltd, a subsidiary of the Mauritius-based parent company, WGHL, which also owns two offshore firms.

“I am further advised that ... any tax that is payable by a company in default is payable by a tax representative of the company and shall be recoverable from the tax representative to the extent of the income or assets of the taxpayer that are in possession or under the control of the tax representative,” said Bell in the court papers.

He wants the court to rule that his appointment is unlawful and procedural.

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