Kenya: KRA After Sh30 Billion in Audit of Companies
The taxman is willing to “negotiate and strike a balance” with multinationals being audited for transfer pricing misconduct, a drive it says has a potential to realise over Sh30 billion.
The Kenya Revenue Authority told a workshop organised by the Association of Chartered Certified Accountants in Nairobi that this will hasten conclusion of ongoing audits on at least 60 companies, some cases of which have dragged on for over four years.
The process has largely been slowed down by delays and failure by companies to produce documents and incomplete reports including missing database to support benchmarking of the prices.
“Resolving a transfer pricing dispute is not easy all over the world,” KRA’s manager in charge of transfer pricing audits Patrick Chege said.
“We are ready to support firms that are willing to fully cooperate with us to avoid going through full dispute resolution process…. We may even write to the Treasury recommending a waiver if the circumstance warrants it.”
Transfer pricing happens when subsidiaries of a multinational trade amongst themselves and opt to pay tax in only one of the countries.
It only becomes tax avoidance when they overstate buying prices and underdeclare selling prices – transfer pricing manipulation – in a bid to avoid the 30-per cent corporation tax.
Unlike tax evasion, tax avoidance is not criminal and it’s usually resolved through a tax arbitration tribunal. Chege said KRA has since 2010 wrote to about 500 conglomerates requesting for transfer pricing reports but only about 200 have complied.
The rest have kept on asking for more time, he said. Locally incorporated multinationals, Chege said, were increasingly registering subsidiaries in tax havens of Mauritius and British Virgin Islands where they declare profits while costs are captured under domestic operations.
They also use invoice re-routing, use of intra-company technical and managerial services, e-commerce and tax treaty abuse and shopping, he said, to avoid taxes.
“Treaty abuse where payment for a service rendered from a different location is done in a country where Kenya has a DTA (double taxation agreement) is becoming a big problem for us,” he said.
Kenya has eight active DTAs – with UK, India, Germany, Canada, Sweden, Denmark, Norway and Zambia – that she uses to track income information for companies operating in both countries.
DTAs with Tanzania and Italy have been signed but yet to be enforced, while those with Seychelles, Nigeria, South Africa, Russia, Finland South Korea, Iran, United Arabs Emirates and Spain are under different stages of negotiations.
However, given that only UK and India largely share companies with Kenya, KRA is in the process of ratifying the G-20 led Multilateral Convention on Mutual Administrative Assistance in tax matters. This will facilitate access to tax information from signatories to the convention that numbers about 15 countries thus far.
The taxman is also keen on signing the Base Erosion and Profit Shifting action plan by the G-20 countries seeking to develop common international standards and guidelines on documenting and reporting about transfer pricing.
KRA invokes section 18 of the Income Tax Act of 1973 and transfer pricing regulations of 2006 to enforce reporting on the subject by companies.
The regulations followed loss of a protracted groundbreaking case against Unilever Kenya for selling its products at a lower price to its Ugandan subsidiary thus denying the KRA taxes.
The only successful high profile case involved flower firm Sher Karuturi that has since exited Kenya for avoiding $11 million (Sh982.3 million) in April 2013.
