KRA Targets Foreign Companies in Fresh Plan to Curb Tax Evasion

Kenya Revenue Authority (KRA) is pushing multinational companies to file their global revenue by country as it seeks to curb tax evasion. The taxman is calling on all companies whose revenue is more than Sh95 billion to ensure they report country by country performance.

“Kenya Revenue Authority informs the public that the Income Tax Act requires multinationals groups with gross turnover of Sh95 billion and above to file a notification form, country by country report, master file and local file for the year 2022 and subsequent years,” KRA said in a statement.

The taxman is seeking to block situations where companies open shell companies in tax havens to hide the source of revenues and thereby evade taxes.

This comes after the Organisation for Economic Co-operation and Development (OECD) countries passed a resolution requiring that all multinationals pay at least 15 percent tax to countries from which they make revenues.

In what is commonly called transfer pricing, companies have been accused of misrepresenting revenue collections from certain countries in order to reduce payable taxes.

“The master and the local file shall be filed not later than six months after the last day of the reporting financial year of the multinational enterprise group,” KRA said. 

In 2013, the taxman forced more than 10 multinational companies to rewrite their financial statements, turning Sh8 billion losses into profits that yielded Sh4 billion in tax revenues.

The firms had used the transfer pricing mechanism to declare losses that effectively disqualified them from paying income tax.

However, a KRA audit of 40 multinationals discovered widespread abuse of transfer pricing – the accounting world’s lingo that is used to describe the costing of transactions between multinationals and their subsidiaries – to declare losses and evade taxes.

“The audit has seen a claw back of loss positions accumulated by these companies to the tune of Sh8 billion, moving them to tax payment positions with respect to future operations,” said John Njiraini, former KRA Commissioner General.

Most of the suspect transactions involved local companies and their subsidiaries located in tax havens that do not charge income tax or whose tax rates are much lower than Kenya’s 30 percent.

Kenya Revenue Authority increased its revenue by almost Sh1billon in 2021 as a result of adopting the (exchange of information) EOI unit which assists jurisdictions tackles tax evasion and illicit financial flows.

According to the Tax Transparency in Africa 2022: Africa Initiative Progress Report, Kenya’s use of EOI resulted in increased revenue gain with Sh 130 million in 2019, Sh10.5 million in 2020, and Sh985.2 million in 2021.