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Revealed: How Karuturi got away with denying Kenya millions of shillings in taxes

By Moses Michira | Mar 25th 2014 | 5 min read
By Moses Michira | March 25th 2014

By Moses Michira

Kenya: What can Sh4.80 buy you in Kenya today? Not much — but that is the price Karuturi Global pays for the most expensive stem of red roses grown by its Kenyan subsidiary.

The same firm can sell the stem in European cities at between Sh90 and Sh100.

This is a classic case of transfer pricing through which Kenya loses over Sh43 billion a year in unpaid taxes, according to estimates of an international relief agency.

To put this amount in perspective, Kenya plans to spend Sh29.3 billion on improving the health sector over the next two financial years. This means the Sh43 billion could help us better equip our hospitals for close to three years.

“I would buy a bouquet of Kenyan flowers at £6 (Sh850) in London,” says Ms Joy Ndubai, a lawyer who studied in the UK.

She says she was shocked to learn that the bunch of flowers she would buy for her apartment at least once a week cost no more than Sh30 to produce in Karuturi’s farm in Naivasha.

Ms Ndubai, who now works for the Tax Justice Network, thinks that it is a case of under-billing by sister companies under Karuturi to minimise the firm’s tax liability in Kenya, a scenario that given credence to Kenya Revenue Authority (KRA) claims that the firm was under-declaring its tax invoice.

Losses by design

Even in Nairobi, which does not compare with London or Amsterdam in terms of demand, a rose stem retails at Sh50.

One in 10 flowers sold around the world are produced by Karuturi Global, most of them grown in Naivasha by a workforce of about 2,500 employees earning less than Sh10,000 a month.

However, Business Beat found that thousands of these workers have gone months without salaries even as their parent company moves to position itself as the world’s largest food producer.

Apart from the skeleton back office staff, which includes professionals like accountants and human resource officers, everyone else earns between Sh6,500 and Sh9,000.

Every day, the company sells at least a million stems produced from its nearly 400-acre farm on the shores of Lake Naivasha.

The company cannot afford better salaries as the revenues earned are dictated by the parent company, said a senior manager who asked to remain anonymous due to the delicate nature of the situation.

“It is loss-making by design,” claimed the manager who has been with the company for more than 10 years.

CFC Stanbic placed the flower firm under receivership last month after it failed to service a Sh340 million loan.

The bank has taken over the firm’s operations and said it would sell off the land Karuturi sits on — which had been given as security. However, the flower firm’s management has protested the move, saying the land, valued at Sh8.2 billion, is worth much more than the loan amount.

Receiver managers from The Business Advisory Group were appointed after Karuturi failed to meet its monthly wage bill and fell behind on payments to creditors.

Christian Aid, a UK-based relief agency, has in the past reported that Kenya was losing over $500 million (Sh43 billion) every year in unpaid taxes by multinational flower firms through a trading mechanism called transfer pricing.

Under the arrangement, several subsidiaries are involved across the production chain — transportation and selling of produce, with the costing of the services offered by each subsidiary varied to minimise payable taxes in jurisdictions that are considered expensive.

Subsidiaries that are most profitable are domiciled in tax-friendly destinations like Dubai and Mauritius. This, however, tends to disadvantage countries like Kenya where the core business is carried out.

In the Karuturi case, for instance, the company reported a loss of Sh208 million last year and claimed Sh129 million in tax credits.

KRA has dragged the company’s directors to court over what it claims is tax dodging to the tune of Sh750 million — covering the first three years of the firm’s operations in Kenya.

On being contacted for comment on its tax liability case with Karuturi, KRA said it “cannot disclose confidential tax matters pertaining an individual taxpayer because that would infringe on his/her rights”.

Karuturi also reported a loss of Sh348 million in 2010, but again claimed tax credit.

The taxman is yet to audit the flower firm’s books from 2010 to date, and a lot more unpaid taxes could be unearthed given the improved market conditions and growing demand for flowers.

Record price surges

Ironically, 2013 was a very good year for the parent company, which is listed at the Mumbai Stock Exchange, according to Henry Muller, the commercial director at Karuturi Global.

He told shareholders in the company’s annual report that the cut flower business was “strong and vibrant”, and the firm’s profit margins were soaring thanks to the weakening of the dollar against the euro, which is the currency its flowers are sold in.

“This was the best Valentine we have had in 10 years, with record price surges. Our top seller, Red variety, fetched euro 0.81 (Sh95.1 at February 14, 2013 exchange rates) per stem,” Mr Muller is quoted in the company’s latest annual report.

The weaker dollar added significant margins to Karuturi’s already comfortable profit margin of 27 per cent, taking it to 32 per cent, Muller added.

In 2013, the company made a net profit of Sh1.5 billion, even though it was the worst year for the local subsidiary since its entry to Kenya seven years ago.

Managers at the Naivasha firm say the Kenyan operation produces more than 75 per cent of the flowers sold through Flowers Xpress, a Dubai-based subsidiary.

Its farms in Ethiopia produce fewer flowers.

The now-controversial company bought the business in September 2007 at Sh4 billion from Sher Agencies, which was then the largest grower of roses globally. Sher Agencies was operated by Dutch horticulturists Gerrit & Peter Barnhoorn.

The acquisition brought into Karuturi’s fold a 188-hectare farmland in Naivasha, which is currently owned by its other subsidiaries, Rhea Holdings and Surya Holdings.

The owners estimated the value of the company’s land and rose-growing business at about Sh9 billion.

Karuturi is a tenant on the land and therefore pays rent to its sister companies, which are ultimately owned by the Dubai subsidiary.

Complex ownership

The complex ownership structure could form the biggest headache for creditors and employees, most of whom have direct dealings with both Karuturi the tenant and flower producer.

Workers’ salaries are now up to four months in arrears. A few employees with very pressing need for cash have been forced to find alternative sources of income, some dangerous.

In one such case, a middle-aged Karuturi employee was electrocuted as he tried to fish in Lake Naivasha just last month. Two others were mauled by hippos while on the same mission earlier this year.

Workers’ unions have vowed not to allow the previous owners back onto the farm, paving the way for what could be the most dramatic labour tussle in recent years.

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