Taxman’s headache over illicit cash flows and transfer pricing

A Kenya Revenue Authority staff serves a client at an iTax support centre yesterday. The centre will serve Central and Northern Kenya regions. PHOTO: JOHN GATHUA/ STANDARD.

The spectre of illicit cash flows into Kenya and illegal transfer pricing by the multinationals pose the greatest challenge to the taxman according to Kenya Revenue Authority (KRA) Commissioner-General John Njiraini.

This is coupled with globalisation that has seen multinationals grow more powerful – some whose capitalisation is bigger than the Gross Domestic Products (GDP) of some developing countries.

“We are under siege from multinationals who have perfected the practice of illegal transfer pricing. They have completely lowered their taxable incomes and we are missing a lot from them,” Njiraini said. “Illicit cash flows are also here especially in this digital economy age where money laundering has been made quite easy.”

This was during the KRA) third annual tax summit which was attended by tax administrators from a number of African countries beginning with Tanzania, Uganda, Rwanda, Ghana and Cameroon.

The assertion was equally shared by representatives from tax administrations in countries that were participating in the forum.

Transfer pricing occurs when subsidiaries under one multinational trade with each other using low prices leading to a declaration of lower earnings or even the parent company which means little taxes paid to the countries the multinational is operating in.

So big is the problem at KRA that Njiraini said the taxman has created a special International Tax Office to specifically handle the illicit flows and transfer pricing headache.

The office at Times Towers Nairobi is headed by Chief Manager George Obell. “We started noticing that the problem is getting out of hand some years back and that is why this office was created,” said Obell in an interview with the Financial Standard.

“Since the fiscal year ending June 2015, we have recovered Sh25 billion from 65 multinational companies that have been engaging in transfer pricing. We have beefed up staff at the office from 16 in 2015 to 40 currently and we are continuing to pursue these multinationals.”

The illicit financial flows are becoming even a larger problem than transfer pricing with the wave spreading across developing countries in Africa like Kenya which lack the risk mechanisms to stop it.

In 2017, Global Financial Integrity reported that developing countries, Kenya included, are absorbing between Sh160 trillion) $1.6 trillion and (Sh220 trillion) $2.2 trillion in illicit cash flows.

Risk management

The money is coming from terrorism-related crimes, drugs, human trafficking, smuggling and most recently modern slavery like the kind that has been reported in Libya where African migrants en route to Europe are trapped and sold as slaves.

According to tax law expert Nikil Hira, a partner at Deloitte and one of the participants at the forum, Kenya has no formidable tax risk management systems which can combat illicit cash flows. “Our laws and institutions are not strong enough to stop the illicit flows,” Mr Hira said.

Obell argues that KRA has come up with a strategy whereby the tax body is continually signing tax information sharing agreements with different nations to forestall the illicit flows.

“We are a member of the United Nations Tax Committee. We are also a member of the Global Forum for Tax Information Exchange. All these help in information sharing that enable us to fight transfer pricing and illicit flows,” Obel said.

But the greatest impediment to signing more multilateral and bilateral information-sharing agreements, Obell explains, is the bureaucracy within the state machinery.

Kenya is a core member of the Organisation for Economic Co-operation and Development which recently came up with Common Reporting Standard (CRS) which requires all member States – including hallowed tax havens such as Mauritius, Dubai, Monaco and the Jersey Islands to share tax information among each other that is crucial for fighting illicit cash flows.

“We prepared the nuances of this agreement a long time ago but parliament is yet to ratify it. We hope as this new House begins a business. It can quickly ratify CRS so that we can get down to work fighting the illicit flows,” Obell said.

Obell also contends that it is the high time the powerful multinationals that are engaged in transfer pricing become thankful to Kenya and engaged in good tax practices instead of waiting for KRA to enact expensive legal mechanisms to fight them.

“I think taxation sometimes is a matter of morality. These multinationals should uphold a bigger moral pedestal and disengage from some bad tax practices such as transfer pricing without waiting for the state to force them through legal mechanisms,” Obell averred.

A notion that Deloitte’s Hira dismissed strongly saying that if the Kenyan taxman lacks the ability to enforce tax laws, he should not hide behind a veil of morality and blame multinationals for all forms of malaise.

Proper mechanisms

“KRA doesn’t have strong institutions and business practices to enforce tax laws, plain and simple,” Hira said. “You can’t keep blaming multinationals all the time without even understanding whether in terms of transfer pricing what they are doing is good or bad.”

“Kenya’s 30 per cent corporate tax is a bit high than many countries and yet these multinationals keep posting profits here. The idea of preaching morality to them is ridiculous. Just come up with proper mechanisms to engage them.” Another participant at the forum, Emily Muyaa, who is in charge of Sub-Saharan Africa at International Bureau of Fiscal Documentation concurred with Hira, saying KRA should work on strengthening its tax law and not treat tax payment as a question of morality.

“KRA should not preach morality in encouraging tax payment. It should work on its legal instruments to ensure rogue companies especially multinationals pay taxes,” Ms Muyaa said.

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