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Kenya enacts new law to save $110m in tax evasion

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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. PHOTO | FILE 

By Allan Olingo

Posted  Sunday, February 21   2016 at  09:01

In Summary

  • 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.
  • 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.

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.

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