How foreign-owned informal businesses are evading taxes in Kenya

Kenya’s informal and unregistered businesses are facing stricter oversight as the Kenya Revenue Authority (KRA) launches a sweeping crackdown on tax evasion.

During the tax summit in October, Moses Kuria, a senior advisor to the President’s Council of Economic Affairs unveiled a plan to convert mobile money paybills and till numbers into electronic tax registers (ETRs) by December 25, 2024.

This move is part of a larger strategy to enhance tax compliance among small and informal enterprises. “We’ve agreed with the Commissioner-General that come Christmas 2024, all paybills will also be virtual ETRs for tax collection,” Kuria announced.

The plan also aims to tackle illegal money transfers, which significantly drain resources from developing economies such as Kenya.

Kuria cited data showing that KRA could collect Sh12 billion from the Sh16 million workers in the informal sector.

In 2020, the tax authority reported losing over Sh200 billion due to challenges in taxing the informal economy.

This year, however, KRA reported an 11.1 per cent revenue increase, which is attributed to measures such as expanding the tax base, which netted Sh24.62 billion, and deploying an electronic tax system that collected Sh314.15 billion.

By converting mobile money paybills and till numbers into trackable electronic tax registers, the government aims to address untaxed transactions often used to disguise income and transfer funds outside formal banking systems.

This could help Kenya recover funds lost to illegal activities and support its sustainable development goals.

Nkunda Sabimana, 30, operates an unlicensed electronics shop in Nairobi. Originally from the Democratic Republic of Congo, he arrived in Kenya in 2016 and began hawking electronics.

“I started as a street vendor, saving bit by bit to expand,” he says, recalling how he eventually acquired his shop in the Central Business District without permits.

Sabimana has evaded scrutiny by county officials for years, but authorities recently caught up with him. “Two men came pretending to be customers,” he recalls. “Then they handcuffed me and took me to the station. I paid a Sh2,000 bribe, and they let me go,” Sabimana claims.

In Kisumu, another unlicensed business owner, 34-year-old Anita Muhawenimane from Rwanda, recounts a similar experience.

“A county official arrested me during a routine inspection. He demanded Sh7,000 to help register my business,” she says, adding that the officer used his identification to register the business and pocket the rest.

These informal business owners operate without permits, tax registration, or bank accounts. Instead, they rely on cash transactions and often keep their earnings at home.

Sabimana uses a Safaricom mobile line registered to his brother in Congo for transactions. “Sending money to Congo is almost the same as sending it locally,” he says.

Muhawenimane, however, struggles with the high fees associated with mobile money transfers. “I dial a short code to send money through mobile transfer. Once it’s withdrawn, I realise almost 10 per cent of the amount is gone,” she laments.

The World Bank’s 2023 Migration and Development report highlighted a 1.9 per cent growth in remittance inflows to Sub-Saharan Africa, despite the rising costs of cross-border transfers.

Yet, high transaction fees continue to affect millions of families. The United Nations Sustainable Development Goal of reducing remittance fees to below three per cent by 2030 remains unmet, with fees averaging over six per cent.

Kenya’s informal sector, while a crucial part of its economy, presents a significant challenge for tax collection due to its unregulated nature.

KRA’s mobile registration plan will directly impact these business owners, as it aims to close loopholes that allow unregistered businesses to evade taxes.

KRA commissioner for domestic taxes Rispah Simiyu reiterated the authority’s commitment to expanding the tax base and enhancing compliance, citing some initiatives in place such as the implementation of eTIMS, streamlined return filing, data analytics, simplified tax obligations for SMEs, and the iWhistle programme.

“KRA intends to collaborate with selected entities to integrate their systems for purpose of submission of electronic documents including detailed transactional data. This will enable us ascertain our accuracy of tax declaration,” she told The Standard by email.

Andrew Franklin, a financial and security risk analyst based in Nairobi, supports tracking finances through SIM card registration.

“There are systemic loopholes. When the Communications Authority of Kenya registers SIM cards, all you need to show is your passport. Nobody is checking your entry dates,” he notes, referring to his personal experience.

Franklin suggests that many foreigners running unregistered businesses exploit Kenya’s lax enforcement of immigration laws, particularly the 90-day visa extension.

“A lot of people are doing this. If you have an East African passport, you can travel freely as a tourist.  “Lifting the extension revolutionised business. The tourism ministry cannot stop immigration,” he says.

Franklin also compares Rwanda and Kenya’s security tracking systems, arguing that Rwanda has strengthened its framework partly due to its recent agreement with the UK to host asylum seekers.“Rwanda’s system is stronger because of its need to vet incoming asylum seekers. On the other hand, Kenya risks exposure to transnational crimes, not just tax evasion or financing terrorism,” he says.

He proposes merging Kenya’s customs and immigration departments to streamline the process of tracking foreigners and their business activities.

While the crackdown may boost tax revenue, it could also push informal business owners toward unofficial, higher-cost channels, further marginalising them.

For Sabimana, the fear of more government oversight looms large. “It’s hard enough to make a profit; now we might have to pay more fees,” he says.

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