Tax Authorities investigate Flower Farms in Kenya
by Market Insider
Wednesday, 30 Apr. 2014
The taxman is investigating firms suspected to be dodging
taxes by conspiring with overseas partners. The audit by the Kenya Revenue
Authority (KRA) targets tea and flower firms, which are suspected of employing
questionable practices to draw off profit from Kenyan operations to
foreign-registered entities in a practice known as 'transfer pricing'.
‘We have done audits in the
flower and tea sectors. We have concluded one case, about Sher Karuturi. We are
ready to start litigation now,’ said KRA official Mr Nyaga. He could not provide
a list of the affected companies because some of them have sued KRA.
Mr Nyaga said the audits were launched last year after most of the
multinationals in the sector returned consistent tax losses and sometimes very
little taxable profits. ‘We had several cases of flower farms that persistently
reported losses, hence the launch of audits. We asked ourselves, ‘what is the
commercial sense of being in business if these firms were persistently making
losses?’ he said.
Ms Jane Ngige, CEO of the Kenya Flower Council,
said the industry was well-regulated by the revenue authority and nonpayers had
been caught. ‘KRA is on top of things. They have carried out several audits and
due diligence,’ she said, adding that payment of refunds to flower firms
confirmed they were tax-compliant.‘The issue of tax evasion by Sher Karuturi has
been in the public domain,’ she added.
In April 2013, troubled Sher
Karuturi was found guilty of tax evasion. The global flower industry giant,
which is the world’s biggest producer of cut roses, was found guilty of tax
evasion, marking the first time an African government had brought a large
multinational company to court for transfer pricing through a fully public
process.
In late 2012, KRA ruled that the India-based multinational
used transfer pricing to avoid paying the government nearly US$11 million (Sh946
million) in corporate income tax, part of a larger set of tax disputes with
government authorities that amount to a quarter of the firm’s 2012 sales.
Karuturi appealed the ruling, bringing the proceedings into the public
domain.
The Income Tax Act requires transactions between resident
companies and their related non-residents to be at arm’s length when determining
the price at which a transfer of goods or services between them is set.
The arm’s length principle meaning is that if a multinational company, say,
has a subsidiary in India and another in Nairobi, as with Karuturi, the two
should be viewed and treated as separate entities.
Source: Daily
Nation