Eyes on KRA as multinationals fail tax transparency test

Kenya-based multinational corporations and major listed companies are facing increasing scrutiny for their lack of tax transparency.  

A recent report by one of the big four consulting firms, PricewaterhouseCoopers (PwC), reveals that some of these cash-rich entities in Kenya operate behind a veil of secrecy regarding their tax obligations, underscoring the challenges the taxman faces in ensuring compliance from these wealthy firms. 

The Global Tax Transparency and Tax Sustainability Reporting Study 2024 published by PwC and reviewed by Financial Standard highlights significant deficiencies in tax transparency and related sustainability reporting among Kenya’s largest publicly traded companies. 

The study found that none of the surveyed firms disclosed their tax strategies or transfer pricing methods, nor did they connect their tax practices to environmental, social, and governance (ESG) goals.

It assessed 10 of the largest companies by market capitalisation, looking at their disclosures on tax strategy, governance, country-by-country reporting (CbCR), total tax contribution, and ESG integration.

The results were shocking, with Kenya lagging behind countries like Spain, the UK, Switzerland, and the US in tax transparency. 

While there have been updates to Kenya’s tax regulations, especially the Income Tax (Transfer Pricing) Rules, 2023 aimed at aligning with international standards and curbing tax avoidance, effective implementation and enforcement of these rules remain crucial experts said yesterday following the report’s findings. 

The findings call for the urgent need for Kenyan multinationals to enhance their tax transparency practices by adopting international best practices.

Improved transparency can bolster their reputations and contribute to a fairer tax system, fostering sustainable economic development, said PwC. 

The timing of this report is significant, experts say, as calls for greater accountability from multinational corporations grow louder both locally and globally.

By addressing the shortcomings highlighted, the report says, Kenyan companies can demonstrate a commitment to responsible corporate citizenship and support the nation’s economic growth. 

“The results pinpoint substantial opportunities for improvement in tax transparency, particularly through the adoption of international standards like GRI 207 and the S&P Global Corporate Sustainability Assessment (CSA) in their integrated and sustainability reports,” the report states. 

It comes at a time when the Kenya Kwanza administration is implementing an aggressive push to expand the tax base targeting individuals as well as small businesses.

The study, however, shines the spotlight on large firms, for instance, noting that no companies in Kenya disclosed their tax strategies or their approaches to transfer pricing.  

Transfer pricing is the setting of prices for goods and services exchanged between different divisions or subsidiaries of a multinational corporation.

These transactions are often referred to as “controlled transactions” because the prices are set internally rather than by an open market. Transfer pricing can significantly impact a company’s tax liability, studies show. 

By manipulating prices, companies can shift profits to low-tax jurisdictions, reducing their overall tax burden. “Only two companies mentioned the governing body’s responsibility for tax strategy, and none disclosed information on tax incentives or compliance commitments,” according to the PwC report. 

Surveying the 10 largest listed companies, the report aimed to understand the extent of their public tax disclosures.

It assessed areas, such as tax strategy, governance, CbCR, total tax contribution, and their alignment with sustainability goals.

Alarmingly, none of the companies linked their tax practices to ESG objectives, and only one referenced GRI 207 as a guiding framework for public tax disclosures. 

The surveyed companies collectively scored a mere 4.8 per cent on tax transparency. Breakdown scores included 5.6 per cent for their approach to tax, 6.3 per cent for governance and risk management, 5.0 per cent for tax numbers and performance, and 2.5 per cent for total tax contribution.

These figures starkly contrast with scores from other countries - Spain (66.6 per cent), the UK (44.3 per cent), Switzerland (32.3 per cent), and the US (30.0 per cent) - highlighting a critical gap in Kenya’s tax practices. 

The report concludes that there is significant room for improvement in tax disclosures among multinational companies, based on international sustainability frameworks. “Most of these firms are at an early stage in their journey towards comprehensive sustainability reporting, and we anticipate improvements in scope and quality in the coming years.” 

Kenyan firms have long been criticised for their tax compliance levels. In response, the National Treasury introduced new Income Tax (Transfer Pricing) Rules, 2023 to align with the Finance Act, 2022.

These rules aim to clarify related-party transactions and curb tax avoidance through profit repatriation. 

The updated regulations expand the range of transactions subject to transfer pricing rules, now including insurance, reinsurance, derivatives, business restructurings, and financial transactions.

Under the previous rules from 2006, only certain tangible transactions were reviewed, but the new guidelines require comprehensive details about related-party transactions. 

For commodity exports or imports, the publicly quoted price at the shipping date will be considered the arm’s-length price, although adjustments can be made in line with the arm’s length principle, as noted in analyses by Ernst & Young. The new rules are largely modelled after the OECD Guidelines. 

Historically, the Kenya Revenue Authority (KRA) has faced tax disputes with several multinationals, including Total Kenya, Kakuzi, and Unilever.

For instance, in 2005, Unilever successfully challenged a KRA demand for taxes on household goods sold to its subsidiary in Uganda, highlighting ambiguities in tax regulations. 

Recently, the Tax Appeals Tribunal ruled in favour of Kakuzi, stating it was not required to withhold taxes on payments made to its foreign marketing agents.

This ruling reinforces the complexity of tax obligations for multinational companies operating in Kenya. 

The study comes at a time when the Ruto government has intensified its aggressive tax policies aimed at individuals and small businesses. Many Kenyans are struggling under the weight of a significant tax burden and are calling for the government to broaden the tax base without imposing additional strain on their finances.

In response to mounting pressure from Gen Z protests, the government initially dropped the controversial 2024 finance bill that was perceived as punitive. However, certain measures from that bill have since been reintroduced, raising concerns among citizens about the ongoing impact of these tax initiatives.

The cash-strapped government previously narrowed its unprecedented probe of a tax evasion syndicate in the country, to the taxman’s large taxpayers office - seen as the key cash cow for the government revenues, Times Towers Agency. 

KRA has been under pressure to seal revenue leaks against the backdrop of higher collection targets set by the government. 

The International Monetary Fund (IMF) revealed earlier that the Treasury believes the accountability checks at the KRA’s large tax payers’ office under whose multinationals and large corporations fall are key in dealing a mighty blow to alleged graft at the agency. 

The Large Taxpayers Office (LTO) currently based along Muthangari Drive off Waiyaki Way in the upmarket Westlands commercial district in Nairobi was formed in 1988 and serves firms with an annual turnover in excess of Sh750 million. 

Taxpayers targeted by the office contributed more than half of the Sh2.166 trillion collected by KRA between July 2022 and June 30 this year in taxes underling its significance. 

President Ruto has often expressed his frustration with KRA’s failure to reach targets. “Starting from April, the Kenya Revenue Authorities (KRA) has in response adopted several Rapid Revenue Initiatives (RRIs) to sustain collection and limit any potential revenue shortfall,” the Treasury told the IMF according to newly published correspondence by the Bretton Woods institution.  

“We expect the RRIs to yield 0.4 per cent of GDP in FY2022/23 by fast-tracking ongoing compliance checks and audits at the Large Taxpayer Office; settling well-identified disputes on tax debt; and providing incentives for timely tax payment.” 

President Ruto had in May this year made a stunning charge that rogue workers at the Times Tower headquartered agency are colluding with tax evaders in what effectively renewed calls for a clean-up of the tax agency. 

Sources in the government earlier said rogue businessmen have been colluding with KRA officers to manipulate KRA systems, especially within the large taxpayers’ office to reduce tax liabilities. 

The sophisticated cartels launch the schemes during tax audits and compliance checks for firms with pending bills. 

They then lure KRA officers and offer them bribes in exchange for a reduction of tax payable. So powerful are the cartels that successive governments have failed to rein them in. 

President Ruto’s warning was the latest from successive heads of government and the most serious allegation levelled against KRA. 

In 2015, former President Uhuru Kenyatta ordered that all KRA staff undergo a compulsory lifestyle audit to account for their sources of wealth. This followed financial scandals that had rocked KRA with revelations that millions of shillings were lost through corrupt deals that involved its officials. 

No public information was ever provided on the audit findings.  Under KRA’s model to classify taxpayers, the taxman implements a relationship management system that assigns each taxpayer a relationship manager to address their needs at a personal level. 

To achieve efficiency and effectiveness, KRA divided its Domestic Tax Department operations into two departments including the Large Taxpayers Office and the Medium and Small Taxpayers (MST)-incorporating the Medium Taxpayers Office (MTO) as a mirror image of LTO.