Kenya loses from flower firm tax tricks

November 2nd, 2010

From Kenya’s Daily Nation:

Kenya Revenue Authority (KRA) says it is investigating some multinationals for abusive transfer mispricing. Among them, according to Mr John Njiraini, the KRA commissioner of domestic taxes in charge of the large taxpayers, are the country’s three largest flower companies.

“We have seen cases of multinationals reporting losses in Kenyan subsidiaries while their parent firms are making huge profits. We are investigating whether they have abused their transfer pricing policies,” Mr Njiraini, said.

The article, quoting TJN’s Africa network, adds that there is a great problem with enforcing transfer pricing arrangements, and with the arrangements themselves:

Mr Njiraini says to be able to crack the abusive transfer pricing syndicate, Kenya requires experienced lawyers in the area as well as tax experts, who are not currently available. Some of the tax-avoidance methods are rampant because there is no legislation against them.

Recently, the OECD’s Jeffrey Owens noted that an astonishingly low 0.1 percent of foreign development assistance is allocated to supporting revenue and customs in developing countries — even though tax revenues are a multiple of the value of foreign assistance: ten times as much, in Africa’s case. It is small wonder that African and other governments have such a hard time confronting the complexities of transfer pricing abuses.

As regards transfer pricing, one of the big problems is the OECD’s so-called arm’s length principle, which is used as the international standard. Many practitioners regard it as all but unworkable – although it has to be said that the complexity that results from this arrangement does create billions in profits for large accountancy firms. As Michael Durst, Michael Durst, a former director of the U.S. Internal Revenue Services’s Advanced Transfer Pricing Program, notes:

“Experience to date is sufficient to demonstrate that the current system is based on faulty assumptions regarding the way multinational business is conducted, so that the system, no matter how hard one seeks to reform it, simply is not capable of functioning acceptably.”

Time for some fresh thinking on transfer pricing, in the interests of the citizens of developing and developed countries. And time for development organisations to start thinking seriously about tax, not least because of its importance in the context of illicit financial flows.

Written by Nicholas Shaxson

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