Chinese Embassy Dragged as Kenyan Tax Authorities Probe Tobacco Firms For Tax Evasion

The Chinese embassy in Nairobi has called in the directors of two local firms linked to China Tobacco, the world’s largest cigarette maker, for questioning amidst an ongoing investigation by the Kenya Revenue Authority (KRA) into potential tax evasion.

According to sources close to the investigation, KRA’s Investigations & Enforcement unit, which specializes in high-profile financial crimes, has raided the offices and warehouses of Yulees Blooms Company Ltd and Shapo Trading Ltd in Kilimani and on Mombasa Road. This action follows allegations of tax fraud.

The investigation centers around the distribution of China Tobacco’s brands, Septwolves and Harmonisation, which are part of the company’s extensive product line that generates significant global revenue. The involvement of a state-owned enterprise like China Tobacco in such a probe could have significant reputational implications, especially given China’s current aggressive stance on tax compliance at home, where the government is enforcing strict measures against tax evasion.

Among those summoned by the embassy is Liu Yuhang, a wealthy Chinese national and a director at Shapo Trading. Both the embassy and Mr. Liu have been unresponsive to requests for comment.

This investigation coincides with a broader initiative by Chinese authorities to increase revenue collection, particularly in light of economic strains from a prolonged property market slump affecting local government finances and overall economic confidence.

The KRA’s actions were sparked by a whistle-blower’s claim that Shapo Trading was under-declaring the value of its cigarette imports, thereby reducing the customs duty payable.

Reports suggest that the companies bypassed using the Electronic Tax Register (ETR) and neglected to stamp excise duty on cigarette packets, flouting key regulatory requirements.

Initial findings indicate that some of these cartons, approximately 40, may have been smuggled into neighboring countries for sale, further complicating the probe.

Additionally, there are suspicions that certain government officials may have played a role in enabling the smuggling and evasion tactics, potentially undermining the local tobacco industry and the livelihoods of local farmers.

An official from KRA confirmed the raids but emphasized the confidentiality of the investigation, citing the Tax Procedures Act of 2015 which limits information sharing.

Shapo Trading Ltd is known for importing the Septwolves and Harmonisation cigarette brands into Kenya, with distribution extending to Uganda and Tanzania. Yulees Blooms acts as the local sales agent, handling distribution across the region.

The surge in consumption of Chinese-made cigarettes in East Africa is partly due to the growing presence of Chinese nationals in the area, some of whom engage in retail sales. This increase in demand coincides with President William Ruto’s administration’s intensified efforts to curb tax evasion, especially after the contentious withdrawal of this year’s finance bill due to public unrest.

As the investigation continues, it underscores the complexities of international business operations and tax obligations, particularly in a context where state-owned enterprises are involved.