Kenya has enacted a law that is expected to stop revenue leakages from transfer pricing through which the economy loses an estimated $110.9 million annually.
Last month, the National Treasury gazetted the Tax Procedures Act 2015, which targets foreign firms with local subsidiaries that have been under-declaring their revenues, while remitting most of it to tax havens.
US-based international financial watchdog, Global Financial Integrity (GFI) has put Kenya’s transfer pricing-related tax losses in the past 10 years at $1.19 billion.
Transfer pricing is the setting of a price for goods and services sold between related legal entities in a way that helps the companies minimise tax exposure.
The Tax Procedures Act gives the Kenya Revenue Authority the powers to audit, investigate and punish dodgy pricing arrangements that have been structured with the intention of avoiding tax.
On Wednesday last week, Kenya signed a global tax deal that will help in a crackdown on multinationals and individuals attempting to evade taxes.
KRA Commissioner General John Njiraini said the taxman is committed to reducing the scope of tax avoidance and evasion through up-scaling the use of electronic data matching and third party information.
“Our signing on to the convention reinforces our will to fight this vice. It will now be harder for multinationals who concentrate their taxes in low-tax countries and tax havens, thereby denying regular countries their share of tax revenues,” Mr Njiraini said.
Kenya signs convention
Kenya’s ambassador to France, Salma Ahmed, signed the convention in the presence of the Organisation for Economic Co-operation and Development deputy secretary general, Douglas Frantz, committing the country to exchange of information that will help governments to collect revenue domestically.
Kenya became the 12th African country to sign the convention.
Maurice Oduor, investment, manager at Cytonn Investments, said the enactment of the law will improve revenue collection.
“If you look at how most multinational companies work, they tend to transfer the bigger chunk of income to safer jurisdictions in terms of taxation and they tend to allocate the bulk of their costs in terms of cost to jurisdictions that have high taxation, especially regions like East Africa,” Mr Oduor said.
Transfer pricing laws were passed in 2012 for Uganda and 2014 for Tanzania.
“In Tanzania, the failure to comply with documentation requirements, leads to imprisonment of up to six months or minimum fine of $30,000 is imposed. Their law also stipulates that failure to comply with the arm’s length principle, documentation requirements and application of the various comparability factors to attract a penalty of 100 per cent of the underpaid tax,” Mr Oduor said.
A report released by the Tax Justice Network-Africa (TJN-A), an affiliate of the African Union, said available documents and statistics from multinational companies only trace about Ksh146 billion ($1.4 billion) lost in trade mis-invoicing between 2002 and 2011.
“The money ends up in tax savings in multinational headquarters and subsidiaries, while data from local firms are manipulated to read losses,” said TJN-A policy and advocacy manager for Africa, Mr Savior Mwambwa, during the launch of the report in Nairobi.
There is increased co-operation between the revenue authorities in the region with KRA serving as the training hub for officials from other tax authorities. For instance, there have been discussions around joint audits of multinationals.
The arm’s length principle is also enshrined in the tax laws of the rest of the East African countries.
Timothy Mukiti, a tax associate at KPMG, said transfer pricing is a key issue globally with many governments and civil society organisations complaining that multinationals operating in their jurisdictions do not pay taxes commensurate to their level of operations in host countries.
The new Act seeks to provide the KRA Commissioner General with additional powers to investigate pricing arrangements take punitive actions amounting to double the tax avoided.
“This move is likely to ignite debate on the differences between tax evasion, which is illegal and tax avoidance, which legally takes advantage of loopholes in the tax legislation to reduce or eliminate tax liability,” said Mr Mukiti.
Two years ago, the KRA declared that it had recovered more than $250 million from over 40 foreign-owned firms that had engaged in transfer pricing. The taxman forced the multinational companies to rewrite their financial statements, turning losses into profits that yielded millions of dollars in tax revenues.
Mr Njiraini said they had carried out over 50 transfer pricing audits with a total tax yield in excess of $250 million whose collection was in various stages of enforcement.
The new Act stipulates a fine for tax evasion that will be double the amount of tax avoided or $50,000, whichever is higher, or imprisonment for a term not exceeding five years, or to both.
Transaction scheming are normally aimed at tax base erosion and profit shifting normally to tax regimes with lower tax rates or no taxes at all (tax havens).
“High value transactions are generated from these lower tax regions. Therefore transactions originating from Kenya will only have low values resulting in lower taxes.
Some of these firms employ artistic accounting that could also be used to deflate the actual company financial position,” Mr Mukoya explained.
KRA last year started a new search for the supplier of a web-based platform to enable anyone to secretly report tax cheats and get rewarded for it.
The anonymous reporting of tax cheats has long been part of KRA’s fight against unreported income and diversion of taxable goods offences.