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Taxpayers could lose Sh600m in KRA tax fraud if Karuturi deal is true

NEWS
By MOSES MICHIRA | March 29th 2014
Karuturi workers demonstrate over delayed wages early this year before CFC Stanbic placed it under receivership after failing to service a Sh340 million loan. [PHOTO: FILE]

By MOSES MICHIRA

Nairobi, Kenya: Kenya could lose more than Sh600 million in a secret deal entered with the taxman, if a claim by a foreign company involved in tax fraud is true.

Karuturi, the world’s largest cut roses producer, has announced that it has secured an agreement with the Kenya Revenue Authority to pay only Sh340 million in back taxes. However, the company owed Sh962 million in the original claim by KRA, the agency that first flushed out the fraudulent tax dodging by the Indian firm.

“KRA had instituted $20 million (Sh1.7 billion) transfer pricing based tax claim on one of the Kenyan subsidiary, Karuturi limited. The company has won a reprieve and will now have to pay only $4 million (Sh340 million) in back taxes. Since this is based on settlement with KRA there shall be no further appeals by the KRA,” the firm said in a statement.

The differing claims add mystery to the operations of the multinational flower firms that are suspected to be conning Kenya as much as Sh43 billion a year in unpaid taxes. 

The company’s position brings to light one of the most prominent tax evasion cases, raising questions on how much exactly the company owed in the first place. KRA’s claim is itself about Sh800 million less than the amount the Mumbai Stock Exchange-listed company had informed its shareholders, which would likely be an accurate position given the size of claim and the management’s responsibility to the owners.

In fact, the managing director Sai Ramakrishna Karuturi and his co-director wife Anita Karuturi are the largest shareholders and have been directly involved in the daily operations of the Naivasha-based farms. The claim therefore suggests that KRA could have been secretly negotiating with the firm to inform the diminishing tax claim.

Confidential matters

KRA has however disowned the deal with the flower grower while citing client confidentiality is declining to offer details of the tax claim and the subsequent reduction.  “Our position remains the same because these are matters touching on a (sic) individual taxpayer’s interaction with KRA and we are bound to treat such matters confidential. We regret that we cannot therefore disclose such confidential matters to the media without the express permission of the taxpayer,” said Ezekiel Maru, KRA’s Marketing and Communication Deputy Commissioner.

In the events that Karuturi actually secured the reprieve as claimed, KRA could be on the spot considering that it would be abetting tax evasion, which is criminal in Kenya.

It is also the agency charged with collecting taxes and that no one, not even the President, can waive taxes. KRA can only waive penalties and interest on back taxes. Waiver of penalties and interest may be accepted only in situations where a taxpayer demonstrates extenuating circumstances and has paid the full principal tax.

The law however limits such waivers to only Sh500,000 if they are to be granted by the Commissioner General, John Njiraini (inset picture) in this case, upon application by a taxpayer citing justification for the request.

Karuturi is also entangled in non-payment of salaries to workers in its flagship business in Kenya, while creditors have taken over the company’s assets to recover about Sh4 billion owed to two banks and a supplier. CFC Bank appointed receiver managers last month as it sought to recover Sh340 million owed by the firm. The bank’s lawyer told a court in Nairobi last month that the company was fleeing Kenya and was actually siphoning money from Kenya through a creative accounting mechanism transfer pricing.

“We are dealing with the people who have fled the country. They (directors) are exporting (flowers) to a sister company in Dubai and the money remains there. They also fled Ethiopia and are now fugitives in India,” said CfC in an affidavit.

KRA has also accused Karuturi of overbilling it local subsidiary for farm inputs and under-billing it on flowers produced. The Standard on Saturday exclusively learnt and reported that the company pays only Sh4.80 for a stem of roses, while it sells the same flowers through a Dubai-based subsidiary at as much as Sh100.

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