Safaricom Sued For Stashing M-Pesa Profits In Tax Havens

Three Safaricom subscribers have taken on the giant telco accusing the company of among others, transfer pricing by unlawfully removing money belonging to M-Pesa account holders from Kenyan and shifting it to low tax jurisdictions.

In a case filed under certificate of urgency, the three claim that Vodafone Group and the related companies have made money in Kenya and should, therefore, not be allowed to ‘cart away’ the money out of country but plough it back into the local economy.

S.Gichuki Waigwa, Lucy Nzola and Godfrey Okutoyi say the carting away of billions has reduced the Tax-to-GDP ratio and long-term prospects for the Kenyan economy.

Further, they claim that the move has increased Kenya’s public debt, thereby unnecessarily leading to higher taxes being imposed on taxpayers.

The trio through their lawyer senior counsel Wilfred Nderitu want the court to compel the company to refund M-Pesa account holders more than Sh305 billion, which they said the company admitted from March 2019 and March 31, 2020.

The subscribers have further accused the Central Bank further of failing to notify other regulatory agencies that the consistently high profits that Safaricom reported were largely being derived from MPesa Account holders’ funds through theft of interest and investment income generated using their monies.

“The Central Bank was at all times well aware that these illegal and unlawful circumstances would ultimately lead to erosion of the shareholder value of Safaricom’s shareholders,” the petition reads.

It is their argument that the transfer pricing between Safaricom Plc on the one hand and the Vodafone Group Plc and its subsidiaries on the other hand was fraudulent, contrary to the relevant OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.

They claim the company manipulated and failed to observe the “arm’s length” principle as to the setting of prices approximate to those set by unrelated parties for comparable goods or services and under comparable circumstances in an open and free market and therefore engaged in tax evasion.

The three have sued Safaricom and its affiliates including Vodafone Group Plc, Vodafone Kenya limited, M-pesa Holding Company limited and Vodafone International Holdings B.V.

They further wants the High Court of Kenya to declare that the Fuliza overdraft service is an illegal and unlawful service for lack of a proper and effective regulatory framework, leading to predatory lending through the charging of usurious interest rates.

“A further Declaration that the Fuliza overdraft service has since inception on-lent, and continues to on-lend, to M-Pesa Accountholders funds belonging to non-borrowing M-Pesa Accountholders without their consent in contravention of the Data Protection Act,” seeks the duo.

They further wants the high court declare that the misappropriation of M-Pesa Accountholders’ funds and the theft of interest and investment income derived from such funds inevitably resulted in the erosion of the value of the shares of Safaricom Plc.

The petitions claim that in January 2009 by the Government through the then Permanent Secretary in the Ministry of Finance Joseph Kinyua, and by the Central Bank of Kenya, stated that M-Pesa Service was risk-free, safe and reliable.

However, they say the statements and were false and made with the intention that they would be acted upon by M-Pesa Account holders and Safaricom shareholders, and that they were so acted upon to the detriment of the Accountholders and the shareholders.

The three wants an order for a determination of the appropriate transfer method applied in respect of the transfer pricing transactions between Safaricom Plc and the Vodafone Group Plc and their associated companies and a re-computation of the appropriate respective prices in accordance with the Kenyan Income Tax (Transfer Pricing) Rules, the OECD Guidelines and the “arm’s length” principle.

“A declaration that the Safaricom M-Pesa Terms which purported that the Registration and Acceptance Form together with the Conditions of Use constituted a binding agreement between Safaricom Plc, M-Pesa Holding Co., Ltd and the M-Pesa Accountholders were null, void and of no legal effect ab initio,” the petition reads.

The three have also sought the lifting the corporate veil of Safaricom Plc, the Vodafone Group Plc, Vodafone Kenya Limited, M-Pesa Holding Company Limited, Vodafone International Holdings B.V., M-Pesa Foundation Charitable Trust, Safaricom Foundation Charitable Trust and Carepay Limited.

“A finding that the Directors of Safaricom Plc, Vodafone Kenya Limited, M-Pesa Holding Company Limited and Carepay Limited were in breach of Sections 140, 143-146 (both inclusive), 168 and 1002 of the Companies Act (No. 17 of 2015) as to Directors’ duties and the prohibition against fraudulent trading,” seeks the duo.

They contend that they suffered the following other forms of injury, loss and damage.

The duo further contend that if they had been receiving the income derived from their real money, they would not have had to be borrowing money which was essentially their own, through overdraft or savings and loan service the Fuliza Service.

They state that they have been made aware of the probable highly detrimental financial consequences that this suit may have for various Defendants in the suit, in view of the magnitude of the decree that may be passed against them, or some of them.

Accordingly, the three argue that without prejudice whatsoever to the foregoing in any respect, that they would at this stage be amenable to exploring an option that is good for all the parties in the suit, such as the conversion of debt to equity.