Bag of tricks used by companies use to avoid paying tax

Auditor General Edward Ouko

The latest Auditor General’s report has opened the lid on some of the tricks companies use to avoid paying taxes, denying the Government critical revenue.

The tricks range from outright collusion between Kenya Revenue Authority (KRA) staff and fraudulent accountants, over-declaring of purchases to filing nil VAT returns. The ploys, some of which amounted to tax evasion, might have cost KRA billions in tax revenues.

In other cases, the tricks only amounted to what is known as creative accounting, which allows taxpayers to exploit loopholes in the law to avoid paying taxes.

Small taxpayers, who cannot afford services of well-established accountants, do not have this privilege.

Auditor General Edward Ouko’s audit on KRA’s revenue accountability statements published in November 2017 called out East Africa Breweries Ltd’s (EABL’s) distributors for over declaring value-added (VAT) tax inputs, thus denying the taxman VAT and corporation tax amounting to Sh270.3 million and Sh454.2 million respectively.

“Review of tax records of Kenya Breweries Ltd, a manufacturer of alcoholic beverages and beer, revealed that the consolidated sales amounted to Sh51.4 billion between July 2014 and November 2016 which differed with the total purchases of Sh52.9 billion by Sh1.5 billion,” said Mr Ouko.

“This overdeclared purchase by distributors denied the Authority VAT and corporation tax of Sh270.3 million and Sh454.2 million respectively,” he added.

The auditor general gave KRA’s financial statements a qualified opinion, meaning he was not fully satisfied with the taxman’s financial books.

He also cited Everest Aviation E A for indicating on its income tax return, sales that differed from actual sales. This denied KRA about Sh23.8 million in VAT.  

There were also cases of sugar imports not bearing authenticated certificates of origin and sugar import permits issued by the Kenya Sugar Board.

This saw importation of sugar exceed the authorised quota from the East Africa Community (EAC).

This not only saw KRA lose import duty but also contributed to the slow death of the country’s sugar industry, which has been grappling with cheap imported sugar.

There were also cases where export consignments lacked exit reports, making it impossible to confirm export of goods.

“Audit review of wholesale sector taxpayers record indicates that transit goods with tax implication of Sh99.3 million were exported to other countries,” said  Ouko.

He also found that the country risked losing Sh18.5 billion in VAT and Sh20.6 billion corporate income tax from the top 25 taxpayers in what he attributed to “tepid tax collection” strategy by the taxman.

There was also an outstanding debt of Sh4.4 billion owed by various companies.

Mr Ouko also raised questions over the manner in which certain tax obligations were reduced or written off, raising questions of collusion between some taxpayers and some KRA staff.

Gerishon Kirima might have died in 2010, but the taxman still hounded him to his grave, with the audit showing that his estate had not paid a tax debt of Sh374.6 million.

Moreover, Ouko queried the manner in which the tax liability was reduced from the initial Sh631.8 million.