Kenya still bleeding from tax evasion

Kenya is losing up to Sh62 billion every year in taxes as companies and individuals use tax loopholes to avoid paying their pound of flesh.

International corporate tax abuse and private tax evasion is bleeding the country close to half its health budget an amount it can use to pay more than 250,000 nurses for a whole year according to the Tax Justice Network.

The November report says the country ranks poorly in managing financial secrecy, affording evaders an opportunity to get away with money that can be put into better use.

The country was ranked seven in Africa for providing conducive ground for tax evasion with its laws and financial systems being programmed to abet global corporate tax abuse and financial secrecy.

The loophole seems to be working against the East African economic giant that now loses more than what Uganda, Tanzania, Rwanda and Ghana bleed combined.

TJN chief executive Alex Cobman said such systems that allow for massive tax losses are not broken by mistake but programmed to work in the same manner.

“Under pressure from corporate giants and tax haven powers like the Netherlands and the UK’s network, our governments have programmed the global tax system to prioritise the desires of the wealthiest corporations and individuals over the needs of everybody else,” Mr Cobman said.

Global loss

Global loss associated with loopholes in the tax systems that allow for use of tax havens is estimated at Sh43 trillion according to the report, which comes at a time when countries are facing imminent economic collapse from the Covid-19 disruptions.

In Kenya, trade, tourism and agriculture have all been hard hit with the tourism already staring close to Sh40 billion loss this year alone after visitors’ numbers went south.

Coronavirus has now exposed the cost of allowing tax abuse which could have ensured better funding for preparedness to tackle health and economic challenges.

Countries such as Kenya are now being called to introduce an excess profit tax to target those who have had a windfall during the Covid-19 period especially the big digital technology firm’s operation across borders.

Health funding organisations such as the Population Service International view the tax losses as the best way to secure money to deal with the pandemic and address other serious health challenges.

PSI General Secretary Rosa Pavanelli said more efforts must be channelled towards ensuring big corporates pay tax and tighten the system to stop the outflows into tax havens.

Health workers

“The reason frontline health workers face missing PPE and brutal understaffing is because our governments spent decades pursuing austerity and privatisation while enabling corporate tax abuse. The only way to fund the long-term recovery is by making sure our tax authorities have the power and support they need to stop corporations and the mega rich from not paying their fair share. The wealth exists to keep our societies functioning, our vulnerable alive and our businesses afloat: we just need to stop it flowing offshore,” Ms Pavanelli said.

Illicit financial flows which involve transfers of money from one country to another that are forbidden by law, rules or custom, deprive public budgets of available resources, compelling low-income countries in particular to rely on foreign investment and loans to support their national budgets.

A key challenge of illicit financial flows is the opaque channels and instruments through which they flow from one jurisdiction to another making the need for financial transparency critical for countries such as Kenya to improve tax collection and fund development.

The 2020 rankings put Kenya’s wealth stashed offshore to be worth Sh420 billion an amount capable of funding a significant portion of the country’s national budget.

In the Financial Secrecy Index that ranks each country based on how intensely the country’s tax and financial systems serve as a tool for individuals to hide their finances from the rule of law, including other countries’ laws, Kenya was ranked among the top 30 in the world.

The country was only second to Algeria in Africa and was ranked worse than China and Mauritius at 24 out of the 133 countries on the list.

The secrecy has enabled transfers of money sourced from questionable deals such as the Anglo Leasing scandal which reportedly transferred $700 million to foreign banks.

Tax evasion

Multinationals operating in Kenya have in many occasions found to be involved in tax evasion schemes including ‘paying expatriates less than local employees’, exaggerating cost of imported goods, exporting very cheaply and paying huge fees for unknown services; all in a raft of tax schemes that bleed the country billions of shillings in unpaid taxes.

The firms, which also have a number of tax exemptions, also abuse the privileges given to them by the government and play hard ball with giving information including resorting to use of their local languages to present information to tax authorities.

In 2018, the Kenya Revenue Authority said it had recovered some Sh9.3 billion from auditing close to 150 multinationals in four years, revealing how multinationals game the tax man’s system to evade paying tax in Kenya. Another Sh6.1 billion remained contested.

KRA said eight out of 10 multinationals in Kenya grossly under-declared salaries they pay to the expatriates while only one out of 10 could not support the heavy expenditures they claimed to have incurred in procuring services, a move that cut down their profits and corporate tax in the process.

“Only payments made locally are taxed while the foreign component is declared elsewhere. The most shocking thing is that the affected multinationals would present employment records which cannot make sense to any tax man. For instance, junior local staff would be said to be earning more than their seniors who are expatriates,” KRA said in a statement.

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