Dodgy multinationals denying Kenya billions of shillings in revenue

Multinationals are denying Kenya billions of shillings in revenue by dodging income tax on the hefty pay perks for their expatriates, Smart Company has revealed.

An employment relationship gone sour blew open the lid that kept the secrets of a multinational firm that has evaded close to Sh1 billion in taxes.

A senior employee of a road construction firm who was taken to court by the employer to gag him from revealing secrets of the company turned around and laid the scheme bare.

Solel Boneh International (SBI) Holdings, in a case first mentioned on December 5, 2012 sought interim orders prohibiting its former finance manager, Amos Hadar from disclosing its trade secrets and other confidential information.

Mr Hadar in a counter claim in the case number 2435 of 2012 would later ask for special damages including the release of the taxes withheld during the six years he had worked at the firm after he failed to obtain tax clearance.

EVADING INCOME TAX

It then emerged that the company had not been deducting or remitting the compulsory income tax from his pay perks, which were cleverly divided into two to keep off the taxman’s net.

SBI paid Mr Hadar a net monthly salary of $9,750 and a gross monthly local salary of Sh383,000, according to documents presented in court.

“The amount which was paid from my home country were meant to reduce what the firm remits in tax and the local salary was supposed to be cumulatively paid at the end of my contract,” Mr Hadar told Smart Company.

“Pay slips came late just like the payments and since we have some allowances to sustain us, we never bothered much until I began seeking a tax compliance certificate.”

The Israeli national said there were more than 50 senior staff whose pay perks were at his level. It is, therefore, possible that Kenya has lost substantial amounts through the scheme.

Estimates from papers presented by his lawyers in court put the figure at US$8 million.

The case, which ended up ordering investigations on SBI over possible tax evasion, also lifted the gag on the former employee and awarded him the salary and allowances owed to him by the Israeli construction firm which has contracts in more than seven African countries.

Interestingly, the firm continued to conceal tax remittance of its highly paid employees for more than six years without being discovered by the tax agency.

TAX EVASION SCHEMES

It is also possible that were it not for the contractual fall out between the firm and Mr Hadar who was in charge of finances, it would have been difficult to detect SBI’s schemes.

KRA Commissioner-General John Njiraini said such schemes are not strange, particularly in the hotel and construction industries. The taxman is banking on cross-border sharing of information and third-party data to curb the fraud.

“It is obviously going to become bigger and bigger as Kenya establishes itself as a regional hub because you have more expatriates coming in. We have fairly significant successes in curbing these cases. What is more important is that we develop the capacity to the level that companies locating regional offices here know we are capable of detecting these issues,” Mr Njiraini said.

The KRA boss was not well briefed on the specifics of the SBI case but our earlier efforts to seek answers from KRA’s relevant departments dragged on for more than two weeks.

Smart Company ended up with responses that carefully avoided mentioning SBI and the question of whether investigations on its tax evasion was underway.

“Income earned by a local taxpayer (resident) and that one earned by a non-resident (expatriate) is taxable in a similar manner. The whole income earned for services rendered in Kenya is considered to have accrued in Kenya irrespective of the mode of payment, including part payment in Kenya and part payment overseas.

The whole amount is therefore taxable in Kenya,” said Mr Moses Maina who is in charge of Policy Unit operations at KRA.

On whether there was investigation on the SBI case and the estimated loss the taxman could be experiencing in similar tax-cheat syndicates, the KRA officer wrote: “On the remaining issues we will revert in due course.”

HOW TO CATCH TAX CHEATS

That was more than a week ago. Kenya hopes to catch multinational tax cheats through the Global Forum on Tax Information Exchange which focuses on the corporate tax that multinationals channel to countries where they can either pay less tax or avoid paying it at all.

The forum allows tax authorities, central banks and other agencies to cooperate in sharing tax information on multinationals.

However, despite the existence of such a platform, addressing the specifics of evasion of income tax by the firms, particularly on what they pay expatriates, may still remain an uphill task.

Kenya which has since engaged several multinationals through its mega infrastructural projects and other public-private partnerships could be losing much more through tax evasion by the foreign firms whose employees may not be caught on KRA’s i-Tax net.

In May, a report released by the Tax Justice Network — Africa (TJN-A), an affiliate of the African Union, said Kenya was losing an estimated Sh639 billion annually in tax evasion by multinational corporations, significantly hampering economic growth.

However, available documents and statistics from such companies could only trace about Sh146 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.

SBI CONTROVERSIES

SBI is not new to controversy. In 2013, the government gave the firm a six-month ultimatum to complete the construction of the Mau Summit-Kericho road after it emerged that the firm had reached defects liability — a set period of time after which a construction project is supposed to have been completed — for the 56km stretch.

It emerged that the firm had engaged in foul play denying Kenya millions in revenues.

“Having heard both parties on the issue of local currency salary figures for expatriate employees, the Court formed the opinion that the firm was engaged in manipulation of salary figures with the aim of denying the Kenya Revenue Authority and by extension the Kenyan public much needed taxes,” Lady Justice Linnet Ndolo ruled.

Former South African President Thabo Mbeki who was in Kenya two weeks ago called for stronger governance and financial intelligence institutions in the fight against illegal financial flow.

Mr Mbeki, who heads the High-Level Panel on Illicit Financial Flows from Africa, said African countries also need closer collaborators and coordination to deal with the problem.

A report released by Mr Mbeki’s team earlier this year showed that Africa loses in excess of $50 to $60 billion every year through illicit outflows.

Kenya on its part has lost an estimated Sh160 billion up to the year 2011.

Mr Mbeki said investigations carried out by his team established that two-thirds of the illicit outflows is as a result of commercial activities which account for 60 per cent.

Criminal activities like trafficking in human beings, drugs, weapons among others, come second accounting for 30 per cent of the illicit outflows.

The stakeholder meeting chaired by Mr Mbeki pointed out poor governance, weak regulatory structures and corruption by top government officials as the key challenges in the fight against the illicit practice.

AFRICAN COUNTRIES LOST BILLIONS
In May 2014, a Global Financial Integrity report said fraudulent trade transactions channelled at least $60.8 billion illegally in or out of five African Countries from 2002-2011.

Tax loss from trade mis-invoicing potentially robbed Kenya of 8.3 per cent of her total revenue collected, according to the report. Uganda lost 12.7 per cent, Ghana 11 per cent while Mozambique and Tanzania lost 7.4 and 8.3 per cent respectively.

The Consumers Federation of Kenya Secretary General Stephen Mutoro said curbing multinational tax cheats will need concerted efforts by government agencies including the immigration departments and the KRA.

“Saying we lose Sh100 billion in tax leakages is an underestimation because there are so many other firms doing the same scheme as SBI did. We need the department of immigration to work closely with the taxman in knowing how many foreigners are in Kenya as expatriates and then it can be known how much they earn,” Mr Mutoro said.

The consumer lobby group boss wondered how the firm got yearly clearances to operate despite engaging in such activities. He blamed the scheme on corrupt cartels within the tax agency and audit firms who collude with the firms to assist the multinationals evade tax.

The Tax Justice Network also estimate that more than $1 in every $6 in the World is not subject to tax creating a huge pool of a shadow economy hidden from the tax authorities.