19 July 2014

Kenya: Extractives Industry Cautioned Over Transfer Pricing

Government's failure to crack down on firms undervaluing mineral exports has resulted in "significant losses" for the Treasury, according to tax advisory firm RSM Ashvir.

Ashif Kassam, the firm's executive chairman, told The Star that this contributed to tax evasion by multinationals through 'transfer pricing' in which the taxman has recently recovered Sh25 billion after an audit.

He said the Sh25 billion cuts across all industries, but that tax avoidance by mining companies makes up a notable part of the sum.

"Yes there have been significant losses. And most of it in multinationals - large tax cases. The government expects to raise an additional Sh25 billion just by making sure there is transfer pricing compliance," Kassam said.

RSM Ashvir addressed investors and industry experts in Nairobi on Thursday after the amended Mining Bill was tabled in Parliament on Wednesday.

Though transfer pricing legislation is not part of the Mining Bill, tightening the rules is part of a parallel drive by the government to ensure multinational firms pay due taxes.

Transfer pricing happens when two companies that are part of the same group trade with each other. It poses a problem for tax agencies in the countries involved when related companies distort the price at which the transaction is recorded, to illegally minimise the overall tax bill.

Cabinet secretary for Mining Najib Balala said a more stringent approach to ensure compliance will be adopted.

"There have been a lot of taxation issues in this sector (mining, oil and gas). There hasn't been any good regime. We still don't have the capacity to appreciate the world market (price, of minerals) and how it is calculated, so we are building capacity in that," Balala said.

"So, the ministry is trying to improve the regime, to make it clear especially with the issues of transfer pricing, expenses to be deductible here in the country, declaration of proxies in terms of who are the nominees and the layers behind it."

Balala said that some international companies have "not been very honest", but the new law once enforced will place compliance responsibility on investors.

"Anyone can engage in transfer pricing. What companies must do is open a branch in another country. But I have not heard of any multinational companies partaking in transfer selling," said Adiel Gitari, chairman of the Kenya Chamber of Mines.

The proposed legislation also requires investors to notify the Commissioner of Mines their shareholding changes. In addition, two ministry officials will be posted to the port of Mombasa to monitor mineral exports.

The bill ignores the Commission on Revenue Allocation's advice on royalty division, meaning communities will continue to receive five per cent of mining royalties, counties 20 per cent and the national government 75 per cent.

"We did not adopt the CRA proposition. It was more complicated in terms of physical transmission of resources - of money to the counties and communities," Balala said.

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