I am a forensic tax investigator within the Authority. I just want to bring something known as round-tripping to your attention.
When the information that the KRA chief has a proxy company in Hong Kong became public, I must say I was terribly disappointed by the lack of mainstream media to carry out a thorough investigation on the possible implications of the chief tax collector having a proxy briefcase company in Hong Kong, but I understand their situation.
Who in his right mind would like to forego the lucrative KRA adverts in their dailies, so here I will give you an overview of what this portends for us and what we would have done if this information was touching on any other normal Kenyan and everyone should then make their own judgement.
Ordinarily, if any tax investigator comes across a structure where a Person based in Kenya owns a company outside Kenya (say Hong Kong) and this company invests back in Kenya or does business with other companies controlled by the same shareholder in Kenya then a red flag is automatically raised.
This is because these structures are used to create transactional losses in Kenya, for example, you can buy tiles from your supplier in China via the Hong Kong Company at say KES 10 Million, the Hong Kong Company then sells to the related (via same controlling shareholder) Kenya Company at 13 million.
Your Kenya Company then sells theses in the Kenya market at say 14 million, hence declaring a profit of only 1 million while the 3 million profits has been transactional transferred to Hong Kong, yet the Hong Kong company has not done anything or added any value in this transaction- of course this is a very basic illustration to just drive the point home- it can get very detailed and complicated, but that is not our interest here. Apart from this kind of shifting profits via the sale of goods, you may also find that the company in Hong Kong charges exorbitant fees on nonexistent management services, royalties for items even as mundane as brand name yet there may even be no solid brand name behind the company name in the first place, interest costs on paper loans issued by the Hong Kong entity to the Kenya affiliate.
A tax person will tell you that all these are costs which wipe out the profits of the Kenya entity because you are allowed to claim these as expenses when computing your taxable profits. I am not saying the chief collectors company did all these profit erosions in Kenya, but as a forensic tax investigator the first thing we are required to do is to rule out any abusive tax planning and this can only be done by an in-depth tax audit- This is what we would have done if we got information that some other regular Kenya based businessman owns a company in Hong Kong or any other low tax or secrecy jurisdiction.
However, because we cannot investigate our top boss one has to understand and let this pass until a suitable time. However, given that the top tax man is not the boss of DCI and now that DCI has opened a criminal investigation on KRA. This criminal investigation MUST start from the top. On this note, I introduce you to a phenomenon known as Round-tripping in tax avoidance and money laundering parlance and the criminal aspects of it that lay squarely on the scope of DCI.
Now round tripping simply refers to a scheme where a resident of one country (read Kenya) takes out money to a foreign country (read Hong Kong) and then brings back this money to Kenya to invest as a foreign investor (Read Hong Kong Proxy company). I am sure you are already wondering why one would do this. Now apart from the tax avoidance and evasion reasons mentioned above (which would not necessarily require round-tripping) here are the reasons why such a concept would appeal to a person in the calibre of a top tax collector in Kenya.
1. If you have a proxy company and a bank account in Hong Kong – you do not need to collect bribes in cash or your Kenya bank account. You just give instructions where this money is to be deposited- by so doing you escape the regulation of Njoroge and his Central Bank. Your Hong Kong Bank has no business reporting to CBK the huge deposits in your proxy account. In other words, you can use your proxy company to launder bribe money and bring it back as a foreign investor.- Remember Gichuru and his company’s bank accounts in Jersey- Just to point out to you that these are schemes that have been there for a long time.
2. Round-tripping is a very effective way of avoiding capital gains taxes in a country like Kenya. First of all, it is important to point out that Hong Kong does not have capital gains tax especially if the underlying assets held via shares in a Hong Kong company, are outside Hong. A proxy company of the Chief tax collector can simply dodge capital gains tax and other taxes such as stamp duty—remember there is already an issue of the chief tax collector trying to void stamp duty on some property in Upper Hill, so this guy already has a reputation in this area but anyway- If you ever buy land or shares for speculation purposes, the day you want to cash in on the investments you have to pay stamp duty and capital gains taxes in Kenya. However if you buy these properties say land and shares in a local company via a company located in Hong Kong, you simply transfer the shares in the proxy company in Hong Kong and voila even no Government official in Kenya will be aware that ownership of the assets located in Kenya has changed hands indirectly because the shareholder of the company owning these assets has changed in Hong Kong and this company has no reporting obligations in Kenya.-
These are the kind of investigations that should occupy the mind of not only the DCI but the strategic intelligence unit of KRA instead of harassing young 20 and 30 year old colleagues who are now being accused of issuing fake compliance certificates simply because they assisted a friend a relative or a friend of a friend who badly needed the tax compliance certificate because it was a requirement for a job or a small county tender for the Youth.
Any criminal investigation in KRA must start with the scrutiny of the bank statements of Njirainis proxy company in Hong Kong otherwise the DCI is merely playing to the galleries.
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