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