Why State must crack down on tax dodging companies

Kenya Revenue Authority headquarters Times Tower, Nairobi. [PHOTO: JENIPHER WACHIE/STANDARD]

Revelations that Africa has lost to rich nations as much money as it has received from them in official development assistance over the past 50 years is a damning indictment on the United States of America and United Kingdom. The two countries led a rejection of a push by developing countries to have a say on rules of taxation of international businesses.

The rich nations showed their true colours in a meeting held in Addis Ababa in July, this year, when they rejected the poor countries’ push to be included in the composition of the Organisation of Economic Cooperation and Development (OECD), which develops guidelines for cross-border trade. OECD rules are widely applied in interpreting and solving trade and tax disputes across the world when transactions are across different jurisdictions.

The rich countries’ stand is understandable given the immense gains their firms—and by extension people—enjoy at the expense of the poor nations. These gains were underscored this week in a report of a high level panel on illicit financial flows from Africa, chaired by former South African President Thabo Mbeki, which estimates that Africa has lost as much as Sh105 trillion over the past 50 years. This is roughly equivalent to what the continent received in development assistance from the West during the same period. The latest estimates suggest that the continent is losing about Sh5.2 trillion, every year, in tax avoidance measures adopted by many multinationals.

Nearer home, various studies have put the amount Kenya loses in these legal, but questionable, practices to Sh100 billion, a figure that is nearly equal to the amount collected in income tax from companies last year. That the situation is serious was underscored by no less a person than Treasury Cabinet Secretary Henry Rotich who, in an interview with Business Beat published by The Standard on Tuesday, admitted that some companies were not paying their fair share of taxes with some of them brazenly claiming losses for over ten years. Interestingly, these ‘artificial’ losses do not stop these companies from rapid expansions and even moving into new lines of business.

Clearly, time has come for the country to adopt new measures to collect the taxes due to it with as much aggression as these companies use to hide them. If this means some of these companies shift base and move their operations elsewhere, so be it. To minimise the chances that these companies would move from one country to another within the same economic community such as the East African Community (EAC), Common Market for East and Central Africa (COMESA) there is an urgent need for leaders to harmonise their investment guidelines. Kenya, as a leading economy in the region, could consider leading this exercise.

Tax avoidance

In the meantime, Treasury officials, many of whom are trained and steeped in the same Western values that see no contradiction in making billions of shillings from the poor and then turning around to offer development assistance usually with strings attached, should wake up and smell the coffee. They should accept that the tax waivers they throw around like confetti does more harm to the economy than good as they make an already bad tax situation worse.

 

 

A restructuring of Kenya Revenue Authority to ensure that its tax collectors are well trained, paid superior salaries and bonuses, when they deliver, and are generally better motivated than their colleagues working in companies whose sole function is to ensure tax avoidance for their clients should be the goal.

The other arms of government, including the Attorney General’s Office and Parliament may also consider taking a second look at the current laws on the country’s books with a view to amending those that give tax dodgers comfort.

Obviously, the country’s battle to get what rightly belongs to it may be sabotaged in the local courts even before the dispute goes to the international courts unless the judiciary also wakes up to its responsibilities and does a better job than has been demonstrated so far. For a tax dispute to be tied up in court for long periods of time, for example, when a quicker resolution would help the government buy drugs for its people is not acceptable.