How Tax Evasion by Big Corporations Continues to Hurt the Weakened Kenyan Economy

In Kenya, a nation grappling with economic challenges, tax evasion by large corporations has become a critical issue exacerbating the fiscal strain on the government. This practice not only deprives the state of much-needed revenue but also distorts competition, undermines investment in public services, and deepens economic disparities. A notable example is the case of Transsion Holdings, the parent company of popular smartphone brands like Tecno, Infinix, and Itel.

The Kenyan economy, already under pressure from global economic downturns, local political instability, and high national debt, finds itself further weakened by the sophisticated tax evasion strategies employed by multinational corporations. According to recent investigations, Transsion Holdings is accused of evading taxes amounting to approximately Ksh. 400 billion (over USD 3 billion).

This staggering figure comes from allegations of under-reporting profits, manipulating financials through transfer pricing, and possibly colluding with corrupt officials within the Kenya Revenue Authority (KRA). The impact of such evasion is profound, considering that this lost revenue could have funded numerous public projects, from healthcare to infrastructure development.

The mechanism of tax evasion often involves complex legal and financial maneuvers. For instance, multinational companies like Transsion might report losses in Kenya while declaring profits in jurisdictions with lower tax rates or tax havens. This practice, known as transfer pricing, allows profits to be shifted to countries where they are taxed less or not at all, significantly reducing the tax burden in Kenya.

Furthermore, the use of cash payments to avoid leaving a paper trail and the alleged non-remittance of Pay As You Earn (PAYE) deductions are tactics that further illustrate the depth of the problem.

The consequences of such tax evasion extend beyond immediate revenue loss. Firstly, it places an unfair burden on smaller businesses and individual taxpayers who cannot avail themselves of similar evasion tactics. This creates an uneven playing field, where local enterprises struggle to compete with multinationals who can lower their operational costs through tax avoidance. The result is often a stymied growth for local businesses, which are the backbone of the Kenyan economy.

Moreover, the Kenyan government’s ability to fund public services is severely compromised. Education, health, and infrastructure, sectors critical for socio-economic development, suffer from underfunding due to the shortfall in tax collection. For instance, the government’s budget for these services could have been significantly bolstered by the Ksh. 400 billion allegedly evaded by Transsion alone. Instead, the government must either cut services, increase borrowing (further inflating public debt), or raise taxes on the populace, none of which are sustainable solutions.

The narrative of tax evasion in Kenya isn’t limited to Transsion. Other big corporations have also been implicated in tax evasion scandals. For example, previous reports have highlighted how companies in the energy sector, particularly those dealing in petroleum, have engaged in practices like under-declaration of imports to evade customs duties.

Similarly, the telecommunications industry has seen its share of scrutiny with allegations of profit shifting and tax avoidance through intricate corporate structures.

The Kenya Revenue Authority has attempted to combat these issues through technological interventions like the implementation of the iTax system for better tax filing and compliance monitoring, alongside special investigations into high-profile cases.

KRA had launched an online web-based reporting solution dubbed iWhistle, that provides a framework for KRA Staff and members of the public to report bribery, concealment, conflict of interest, evasion, tax fraud, abuse of office, diversion of goods, tax evasion, manufacturing of counterfeit goods and other tax related crimes, upon seeing, hearing or suspecting the aforesaid.

However, the agility and resources of these corporations often outmatch the capabilities of the tax authority, which is sometimes plagued by corruption or lacks the sophisticated tools needed to catch up with global tax evasion strategies.

From a broader perspective, tax evasion by big corporations also affects Kenya’s attractiveness as an investment destination. While the country aims to attract foreign direct investment to spur economic growth, the presence of widespread tax evasion can signal to potential investors about governance and legal risks, deterring investment or pushing companies towards similar unethical practices to remain competitive.

To address this, there is a clear need for legislative reform, international cooperation, and enhanced enforcement mechanisms. Kenya could benefit from adopting global standards like the OECD’s Base Erosion and Profit Shifting (BEPS) project, which aims to curb tax avoidance strategies by multinationals.

Additionally, fostering transparency, strengthening anti-corruption measures within KRA, and possibly leveraging whistleblower protection could enhance the government’s ability to tackle tax evasion.

In conclusion, tax evasion by companies like Transsion not only starves the Kenyan economy of vital resources but also undermines the principle of fair taxation, which is crucial for equitable economic development. The ongoing challenge for Kenya is not just to catch up with these corporations in terms of tax enforcement but to create a system where evasion is less attractive and more risky, ensuring that the economic burden is shared more equitably across all sectors of society.