Developing countries, including Kenya, could be losing billions of shillings to global corporations that move money across borders to their several subsidiaries while undervaluing their transactions.
The illegal practice-based money laundering, called “trade misinvoicing”, is the largest component of illicit financial outflows measured by Global Financial Integrity.
A report by the ongoing United Nations Conference on Trade and Development (Unctad) in Nairobi revealed that commodity-dependent developing countries are losing as much as 67 per cent of their exports, worth billions of dollars, to trade misinvoicing.
The study, released during the Global Commodities Forum, uses up to two decades’ worth of data covering exports of commodities such as cocoa, copper, gold and oil from Chile, Côte d’Ivoire, Nigeria, South Africa and Zambia.
“This research provides new detail on the magnitude of this issue made even worse by the fact that some developing countries depend on just a handful of commodities for their health and education budgets,” said Dr Mukhisa Kituyi, the Unctad secretary-general.
The analysis shows patterns of trade misinvoicing for exports to countries such as China, Germany, Hong Kong (China), India and Italy.
Others were Japan, the Netherlands, Spain, Switzerland, the United Kingdom of Great Britain and Northern Ireland, the United States of America, and others.
Kenya has witnessed cases of the vice when, in 2012, flower firm Karuturi was alleged to have been involved in tax evasion.
The Kenya Revenue Authority (KRA) started the process, which would later determine that the Naivasha-based multinational used transfer mispricing to avoid paying the government $20 million, or nearly Sh2 billion at today’s exchange rate, in corporate income tax.
Lobbies argue that the government has been opening a loophole that allows super-rich individuals and multinational companies to avoid taxes, especially Double Tax Agreements with countries that charge little or no tax.
The Tax Justice Network (TJN), a lobby, has sued the government over agreements that it says are robbing Kenya of the ability to raise revenues domestically, driving the country to the brink of a financial meltdown.
Listed firm Flame Tree Group was put in the spotlight over possible transfer pricing aimed at taking advantage of this, and to reduce tax paid in the country.
The Flame Tree Group has trading subsidiaries in both the United Arab Emirates (UAE) and Mauritius, which have very friendly taxation regimes on profits made by corporations as well as on capital gains.
According to a report in a local daily, the manufacturing arm reported a loss of about $220,000 in Kenya, which charges a corporation tax of 30 per cent, while its trading arm called Cirrus, generated about $2 million since no corporation tax is charged in Dubai, where it is based.
The net profits were then consolidated in the parent office in Port Louis, Mauritius, where corporation tax is 3 per cent.
Several multinationals have subsidiaries in Kenya and Mauritius, which effectively exposes the country to possible revenue losses under the Double Tax Agreement.
Mauritius-based investment firm Alteo this year announced plans to take up a 51 per cent stake in Transmara Sugar Company Ltd (TSCL) while Omnicane, also registered in Mauritius, has a 25 per cent stake in Kwale International Sugar Company Ltd (Kiscol).
Essar Energy Overseas Ltd, which bought a 50 per cent share of Kenya Petroleum Refineries Ltd (KPRL), was incorporated in Mauritius.
Waguthu Holdings (K) Ltd, the company associated with the multibillion-shilling real estate project, Tatu City, is also owned by a parent company incorporated in Mauritius as MCIH.
Kenyan investment firm Centum also incorporated Centum Development and Centum Exotics, both based in Mauritius and meant to tighten its grip on the region.