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Multinationals rob Kenya of Sh78b in tax evasion, says US research firm

BUSINESS NEWS
By Moses Michira | December 16th 2014
Kenya Revenue Authority Commissioner John Njiraini

Kenya was conned of more than Sh78 billion through corruption and tax evasion between 2003 and 2012, a US-based research firm has reported.

Researchers from Global Financial Integrity (GFI) compiled the losses, which they describe as "modest" considering gaps in information, but could be bigger than all mega-scandals, including Goldenberg, combined.

The findings could mount pressure on Kenya's bilateral partners whose companies and individuals are accused of perpetrating the crimes while the proceeds end up in foreign banks. The losses were much larger than the combined foreign direct investment (FDI) and aid given to Kenya, and for all the other developing countries.

"These outflows — already greater than the combined sum of all FDI and aid flowing into these countries — are sapping roughly a trillion dollars per year from the world's poor and middle-income economies," said GFI President Raymond Baker, a specialist on financial crime.

Huge effect

Tax evasion by big firms has a huge effect; hurting ordinary households that have to be taxed more to support road construction, among other development projects.

While Baker's report did not identify any of the companies, perhaps for fear of litigation, most of Kenya's big corporate firms have European ownership.

The report released on Sunday evening pegs cumulative illicit outflows from developing economies across the world at Sh600 trillion (US$6.6 trillion) between 2003 and 2012, the latest year for which data is available.

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Some 151 countries that are categorised as poor or emerging economies were surveyed, with 2012 coming up as the worst year.

Kenya's outflows were grossly under-reported because researchers were able to find data for only four of the 10 years under survey.

In 2003 alone, Baker's team reports that Kenya lost Sh24.5 billion through illicit means, including tax evasion, corruption and crime.

The findings for the first time offer an indication of how much the poor and developing economies are suffering from the plunder, and the real shocker in how fast the theft is worsening.

Alarming rate

"Most troubling, however, is the fact that these outflows are growing at an alarming rate of 9.4 per cent per year — twice as fast as global GDP," the report says.

Dev Kar, the lead researcher, reported that in all the cases, including Kenya illicit outflows "significantly outpaced economic growth".

"These findings underscore the urgency with which policymakers should address illicit financial flows," Dr Kar said.

Kenya has particularly been grappling with huge budget deficit and widening revenue collections, which authorities attribute to tax evasion by multinational firms that are operating in the country.

The Kenya Revenue Authority (KRA), as recently as two months ago, reported that multinational firms had cheated the Government more than Sh30 billion.

"From the audits we have done, there is Sh30 billion in transfer mis-pricing alone and what is out there is still unknown because we don't have the data," Patrick Chege, a manager in-charge of the Transfer Pricing Unit at KRA told The Standard in a recent interview.

Nearly 80 per cent of all illicit flows, the Washington-based GFI found was through mis-invoicing – where the multinational firms booked most of their expenses in the poor countries to shift profits to sister companies operating in lower tax jurisdictions.

GFI concludes that fraudulent mis-invoicing of trade transactions was the largest component of illicit financial flows from developing countries, accounting for 77.8 per cent of all illicit flows.

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