Kenya: KRA Wins Sh1bn VAT Fraud Case Against Chinese Firm

14 August 2024

Nairobi — The Kenya Revenue Authority (KRA) has won a value-added tax (VAT) fraud case against a Chinese firm.

According to the taxman, the company evaded taxes by wiring incomes through shell companies to accounts in China.

The fraud, commonly known as 'the missing trader' tax evasion scheme, was demonstrated in an appeal filed by China Communications Construction Company Limited at the Tax Appeals Tribunal (TAT) while seeking to have a tax assessment of Sh1.05 billion set aside.

The firm is a majority state-owned, publicly traded, multi-national engineering and construction company founded in the Republic of China.

It is engaged in the design, construction, and operation of infrastructure assets, including highways, bridges, tunnels, railways, roads, airports, marine ports, and oil platforms.

After hearing the KRA submissions of the case filed on May 25, 2023, and in which the Commissioner for Investigations & Enforcement was the respondent, the TAT upheld the assessment and dismissed the appeal last Friday.

KRA investigations conducted an audit on China Communications Construction Company Ltd's affairs and issued it with an assessment on February 3, 2023, for VAT and income tax.

However, the company objected to the KRA's assessment and moved to the TAT, claiming that the audit was erroneous in fact and in law.

As per KRA's assessment, the firm was involved in a complex tax evasion scheme that entailed claiming inflated input VAT for purchases that had not been incurred or were not related to genuine business activities using fictitious invoices obtained from both fraudulently registered and non-existent companies to avoid or reduce tax liabilities.

In this case, the TAT was shown as China Communications Construction Company Ltd claimed input VAT of purchases of goods and services that were never supplied.

A detailed evidence showed that the Chinese firm claimed inflated input VAT from six fraudulently registered companies whose directors, as indicated in the company profiles, were not aware of the existence of such companies as well as purchases and financial transactions.

The six companies are Dial an Errand Ltd (Sh638.23 million), Haru Limited (Sh156.53 million), Njafos Holdings Ltd (Sh256.93 million), and Masaviru Investment Limited (Sh157.035 million).

Others are Math and Kith Investment Company Limited (Sh213.45 million), and Lunza Solutions Limited (Sh221.06 million).

The above six shell companies (tier 2), with no known physical addresses and locations, would in turn claim input VAT of various amounts in hundreds of millions each from other shell companies (tier 3) identified as Benlaz Company Ltd, Hao Yuan International Company Limited, Colila Ltd, Crystal Touch Company Ltd, Akubi Ltd, Homematt Ltd, and Ujenzi Suppliers Ltd.

These tier 3 companies would also claim input VAT from two other shell companies (tier 4), such as Papaya Company Ltd, in hundreds of millions.

In the case of Njafos Holdings Limited, for example, it was observed that the account signatory, George Makuthi Nderitu, was different from the director indicated by the Registrar of Companies, Simon Musyimi Musyoki, whereas the registered director for Benlaz Company, Suleiman Odhiambo Oganga, stated that his identity had been used fraudulently to register the company and was unaware of any transactions.

Similarly, the registered director for Colila Limited, Lassina Coulibaly, left Kenya in 2006 based on the travel history from the Department of Immigration. On the other hand, Crystal Touch Limited by then had already been struck out from the Registrar of Companies' records.

Apart from demonstrating that fictitious invoices generated in the whole scheme were used to legitimise the transfers and to reduce tax liability on the significant income received by the Appellant (Chinese firm), the financial transactions trail showed that the shell companies would be paid for the supply of construction materials, but the subsequent recipients of the monies would immediately transfer the funds to their USD accounts, from which they wired overseas, including China.

In the end, the Tribunal noted that the elaborate tax avoidance scheme was proved considering that the said assertions were not shaken during cross-examination nor did the firm provide any evidence or proof to show that the KRA's assertions were wrong or erroneous.

"The Appellant failed to address the issues of fraud and tax avoidance schemes raised by the Respondent's witness. The moment the said witness completed its testimony asserting that the Appellant had been involved in an elaborate tax avoidance scheme the burden of proof shifted to the Appellant to provide evidence by way of affidavit, witness statements or otherwise to rebut these assertions. This was not done in this case," the tribunal ruled.

The Tribunal further held that KRA's testimony showed that the totality of the firm's transactions did not support a reasonable commercial transaction but was instead an elaborate scheme to avoid payment of tax in Kenya.

"Moreover, it is also not possible or common in a typical arms-length transaction that all the traders and entities who were doing business with the Appellant could have adopted the same modus operandi of lacking documents, converting its KShs to USD, and transferring its monies to China," it was further held.

AllAfrica publishes around 500 reports a day from more than 100 news organizations and over 500 other institutions and individuals, representing a diversity of positions on every topic. We publish news and views ranging from vigorous opponents of governments to government publications and spokespersons. Publishers named above each report are responsible for their own content, which AllAfrica does not have the legal right to edit or correct.

Articles and commentaries that identify allAfrica.com as the publisher are produced or commissioned by AllAfrica. To address comments or complaints, please Contact us.