KRA wins Sh1.1b tax case against Chinese infrastructure firm

A tax tribunal has ordered a Chinese company to pay Kenya Revenue Authority (KRA) Sh1.1 billion in taxes.

This is after the Tax Appeals Tribunal (TAT) dismissed an appeal by China Communications Construction Company Ltd seeking for a tax assessment of Sh1,047,557,661 set aside.

“We find the appellant was involved in an elaborate scheme to avoid tax, Section 21(3) of the ITA which justifies and upholds any assessments or adjustments made by the Commissioner regarding a transaction carried out to avoid tax liability would kick in. The Commissioner was thus justified in its tax assessments of the Appellant. The Appeal lacks merit and the same is hereby dismissed,” the tribunal led by chairman Eric Wafula ruled.

The taxman informed the tribunal that tax fraud investigations into the Chinese firm exposed how it fraudulently evaded payment of over Sh1 billion tax and transferred income derived through shell companies to accounts in China.

The firm is a majority state-owned, publicly traded, multi-national engineering and construction company founded in China.

The company is engaged in design, construction and operation of infrastructure assets including highways, bridges, tunnels, railways, roads, airports, marine ports and oil platforms.

KRA Investigations conducted an audit on China Communications Construction Company Ltd affairs and issued it with an assessment on February 3, 2023 for VAT and income tax.

The company objected to the KRA’s assessment and moved to the TAT claiming that the audit was erroneous in fact and in law.

From the audit that led to KRA’s rejection of the taxpayer’s VAT input claims, KRA investigations established that the firm was involved in a complex tax evasion scheme.

That it entailed claiming inflated input VAT for purchases that had not been incurred or were not related to genuine business activities using fictitious invoices obtained from both fraudulently registered and non-existent companies to avoid or reduce tax liabilities.

The TAT was shown how China Communications Construction Company Ltd claimed input VAT of purchases of goods and services that were never supplied.

A detailed evidence showed that the Chinese firm claimed inflated input VAT from six fraudulently registered companies whose directors as indicated in the company profiles were not aware of the existence of such companies as well as purchases and financial transactions.

The six companies are Dial an Errand Ltd (Sh638,251,386), Haru Limited (Sh156,532,074), Njafos Holdings Ltd (Sh256,932,293), Masaviru Investment Limited (Sh157,035,000), Math and Kith Investment Company Limited (Sh213,448,586), and Lunza Solutions Limited (Sh221,061,000).

The six shell companies have no known physical addresses and locations, would in turn claim input VAT of various amounts in hundreds of millions each from other shell companies identified as Benlaz Company Ltd, Hao Yuan International Company Limited, Colila Ltd, Crystal Touch Company Ltd, Akubi Ltd, Homematt Ltd and Ujenzi Suppliers Ltd.
“The entities mentioned had no physical addresses from where they traded or stored the huge materials allegedly purchased by the Appellant,” the tribunal heard.

These companies would also claim input VAT from two other shell/ companies such as Papaya Company Ltd in hundreds of millions.

In the case of Njafos Holdings Limited for example, it was observed that the account signatory, George Makuthi Nderitu, was different from the director indicated by the Registrar of Companies, Simon Musyimi Musyoki whereas the registered director for Benlaz Company, Suleiman Odhiambo Oganga, stated that his identity had been used fraudulently to register the company and was unaware of any transactions.

Similarly, the registered director for Colila Ltd, Lassina Coulibaly, arrived in Kenya and departed in 2006 based on the travel history from the Department of Immigration.

On the other hand, Crystal Touch Ltd was struck out from the Register of Companies’ records. Financial transactions trail showed the shell companies would be paid in Kenya shillings for supply of construction materials but the subsequent recipients of the monies would immediately transfer the funds to their USD accounts from which subsequent wires are made overseas including China.

The tribunal noted that the elaborate tax avoidance scheme was proved considering that the said assertions were not shaken during cross-examination. “The Appellant failed to address the issues of fraud and tax avoidance schemes raised by the Respondent’s witness. The moment the said witness completed its testimony asserting that the Appellant had been involved in an elaborate tax avoidance scheme the burden of proof shifted to the Appellant to provide evidence by way of affidavit, witness statements or otherwise to rebut these assertions. This was not done,” tribunal ruled.

The tribunal further held that KRA’s testimony showed that the totality of the firm’s transactions did not support a reasonable commercial transaction but was instead an elaborate scheme to avoid payment of tax in Kenya.