Multinationals operating in Kenya, Tanzania and Uganda will be among the first in Africa to feel the impact of new measures to be adopted in January to curb tax losses caused by manipulation of contracts between related companies.
The three countries together with Nigeria, Ghana, Burkina Faso, Senegal, Botswana and South Africa, formed a technical group that this month led to the adoption of the Base Erosion and Profit Shifting (BEPS) action by the G20, which aims to save developing countries an estimated $150 billion in tax losses, a quarter of them in Africa.
“We expect to see definite improvements in revenue collection from the deterrent effect of better legislation, treaties and enhanced guidelines and transparency initiatives we are rolling out effective from 2016,” said Alice Owuor, Kenya Revenue Authority commissioner for domestic taxes.
No reliable data exists on the extent of tax avoidance by multinationals in Kenya. However, KRA Commissioner-General John Njiraini reported in September 2013 that an audit of 40 companies mainly in the horticulture sector had reversed losses of $80 million into profits that yielded more than $40 million in tax revenue.
Conservative estimates from Global Financial Integrity (GFI), a US illicit flows watchdog, has estimated Kenya’s transfer pricing-related tax losses at $115 million annually.
Ms Owuor said KRA has since been conducting audits on transfer pricing and international tax after noticing anomalies in tax records of multinationals.
“We have observed a worrying trend in statistics, where corporation taxes from companies doing business in Kenya constitute lower yield on domestic revenue than Pay as You Earn from employees’ earnings per year. These statistics point to anomalies in the manner in which companies declare taxes in Kenya and particularly multinational firms engaging in transfer pricing and abusive tax avoidance,” she said.
Under the Africa Tax Administration Forum, the governments will in 2016 collectively draft proposals, including legislative changes, which countries will adopt individually.
“Key among the developments have been amendments to treaties to mitigate against abuse and artificial avoidance of a taxable presence in the source country and model legislations to strengthen domestic tax laws to deal with issues such as Controlled Foreign Corporations (CFCs),” she said.
CFCs are companies whose major shareholders are in a separate jurisdiction, making a registered entity in another jurisdiction subject to the first country’s tax laws.
KRA has drafted amendments to the Income Tax Act to deepen the definition of permanent establishment, review the thin capitalisation rule, strengthen transfer pricing legislation, and review existing limitation of benefits clauses.
Other reviews underway that could feature in next year’s Finance Bill include proposals on CFCs and artificial transfer of assets to preferential tax jurisdictions by local companies.
The countries are expected to sign the Multilateral Convention on Mutual Administrative Assistance in Tax Matters in order to benefit from information on country-by-country reporting and access to private rulings as well as transaction information of businesses engaged with related foreign entities that may have led to less taxes being declared.
Adoption of BEPS by Kenya, Uganda and Tanzania will eventually see the action plan extended to the East Africa Community; and Somalia and South Sudan have applied to join.
“At an appropriate time, the EAC structures will be engaged to ensure that other EAC partners have the benefit of the exposure of the three countries to the BEPS work,” Ms Owuor said.