Firm in military deal sought tax avoidance

Kisumu residents report to Kenya Revenue Authority offices at Swan Centre on June 30, 2016 to file their tax returns. Details have emerged that a firm contracted to service Kenya's military was registered in a tax haven. PHOTO | NATION MEDIA GROUP

What you need to know:

  • According to the contract terms, Leopard would receive Sh18 million to work on helicopters at the Embakasi Garrison, Nairobi.
  • While it is not illegal for the government to do business with a company registered in a tax haven and that has gone out of its way to avoid paying tax, experts say it is morally questionable to transact with such entities.

A company that was contracted to repair military equipment in Kenya was registered in a tax haven and had opened an offshore account explicitly to avoid paying tax.

Leopard Systems Inc, registered in the notorious tax haven of Panama, signed a contract with the Ministry of Defence in 2010 to provide logistical and technical support for MDHI helicopters bought from the United States.

According to the contract terms, Leopard would receive Sh18 million to work on helicopters at the Embakasi Garrison, Nairobi. It was not clear what kind of work would be done on the aircraft.

According to documents contained in the second release of the Panama Papers data leak, coordinated by the International Consortium for Investigative Journalists, it appears Leopard hired Panamanian law firm Mossack Fonseca to open an offshore bank account for the explicit purpose of avoiding tax.

“It is our desire to open a commercial bank account in Panama City or other secure location that will provide the services we require in the operation of our business.

“Incoming funds would be in the form of either telegraphic transfers or more likely by means of documentary credits originating from banks in Kenya and possibly other East/Southern African states. Outgoing transfers would invariably be to service our accounts, all of which would be outside of Panama, with the exception of payment of fees to Mossak Fonseca,” says an email sent by Leopard CEO Robert Wilhelm in 2010.

The account was specifically designed to avoid paying tax, as Mr Wilhelm admitted when he gave instructions to open it in Panama, and if not, in another tax haven such as Mauritius or the Seychelles.

“The service offered was primarily to provide the company with legal tax avoidance. I emphasise ‘avoidance’ and not ‘evasion’.

We carefully structured our company in a manner that kept the company from tax liabilities in jurisdictions where there was no legal requirement to file returns,” said Mr Wilhelm in the email.

TAX COMPLIANCE

While it is not illegal for the government to do business with a company registered in a tax haven and that has gone out of its way to avoid paying tax, experts say it is morally questionable to transact with such entities.

“Companies registered and operating from Panama do this to take advantage of either the low taxation (avoidance) or to conceal the activities (evasion), or both. Whether the case is avoidance or evasion, from a tax point of view, it raises serious questions to contract a firm operating from a tax haven,” said Tax Justice Network — Africa Executive Director Alvin Mosioma.

He added that the government was required to do due diligence on a company’s tax practices, among other things, before it does business with it.

“Kenya’s procurement laws have a stringent requirement for tax compliance as a condition for having access to government contracts. The rules apply for both local and foreign entities. The government regulation encourages joint ventures between local and foreign entities but the tax requirements remain the same,” he said.

He added that there were, however, special cases where the government could agree to waive some taxes due by the contracting entity.

In such a case, the company would be expected to provide evidence for such an arrangement.

Efforts by the Nation to reach Leopard Systems Inc for a comment on the matter were not successful.

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