(Business Daily Africa)-15th August 2007
Treasury's public finance reform unit says there is a high level of tax evasion and too many waivers that reduce government revenue.
Although a detailed study is yet to be done, tax experts have estimated that it is possible to collect Sh600 billion or 50 per cent more tax, than is currently the case. The 2006/7 collections were Sh376 billion, but Treasury expects to get Sh429 billion in the 2007/8 fiscal year, which is about 21 per cent of the gross domestic product.
Uganda collects about 23 per cent of its GDP, while a middle income countries such as Greece has been know to collect up to 45 per cent of its GDP.
It has also emerged that not enough efforts have been put towards ensuring that non-tax revenue is collected. The little collected is not even remitted to the Treasury and may be ending up lining individuals' pockets.
Although Finance minister Amos Kimunya thanked Kenyans for paying tax when he presented the Budget in June, concern has emerged over actual potential of revenue collection as Treasury embarks on reforms under the Public Financial Management (PFM) programme.
A paper on the constraints to better PFM says: "Diagnostic studies have revealed that there is a high level of tax evasion and waivers. In addition, the level of efforts to collect non-tax revenue is low and revenue collected is sometimes not remitted to Treasury, leading to excess and hidden expenditure."
An attempt by Business Daily to get a response from the Kenya Revenue Authority was unsuccessful. KRA is headed by Commissioner General Michael Waweru.
However, tax expert Paulino Mutegi of Ernst & Young says that even GDP figure must be lower than the actual production in Kenya, indicating that a much higher level of tax is possible.
"I cannot say for sure how much more can be collected, but the potential is great. Many people don't pay tax on income from buildings they own and the jua kali sector largely goes untaxed," Mr Mutegi said. He urged the government to have a friendly tax regime, adding that many people who are currently not paying tax would end up paying voluntarily.
He said many farming activities as well as those in the informal sector were not captured in the GDP. Total revenues, including appropriations-in-aid, are projected to increase by about 14 per cent, bringing the total tax collection to about Sh428.8billion.
The state believes that the improved performance is underpinned by on-going reforms in tax administration, while the streamlining of the exemptions regime in line with other East African Community partner states is also expected to protect the revenue base. But critics have pointed out that revenues can exceed Sh600 billion if tax administration as well as the capacity of KRA were improved.
Tax evasion problem In sub-Sahran Africa, revenue to GDP ratio is below 20 per cent, showing that Kenya is among the highest in the region.
However, in a country like Greece, the ration was 46.5 per cent in 2003. In Uganda, the ratio is about 22 to 23 per cent, yet the country has less than half the size of Kenya's economy. Thus it is possible for Kenya to get at least 30 per cent of GDP in revenue if stringent measures were to be effected.
The tax evasion problem is not unique to Kenya. The Tanzanian Revenue Authority is currently facing a daunting task because the revenue to GDP ratio, at below 15 per cent, remains significantly below the average for Sub-Saharan Africa.
The paper by PFM further shows that Kenya's financial management system suffers also because budget disbursements are unpredictable as payments can be delayed resulting in high arrears. "Cash management and commitment is still poor," says the report.
It notes that the variance between the annual budget and the final expenditure outcome is high. Mr Kimunya recently said the finances needed to be streamlined to ensure that resources allocated were actually spent rather than returned to Treasury as is the case from year to year.
"Parliament's, line ministries and district level involvement in the budget process is low and the process delayed. Budget allocations do not adequately address poverty alleviation," the report said.
Wednesday, August 15, 2007
Monday, August 13, 2007
Kenya: Challenges of Collecting Tax across Countries
13th August 2007 (East African Standard)
In many developing countries, multinational corporations hold a large swathe of the economy - agriculture, manufacturing and tourism being the most visible.
In Kenya, for example, foreign multinationals dominate agriculture, especially horticulture. There is much debate between those who consider globalisation to be a malignant influence on poor nations and those who find it a positive force.
The debate focuses not just on trade, but also on multinational corporations. And one of the most controversial but least understood of a multinational's operations is transfer pricing. This governs transactions among divisions in a company.
For a company operating in a single tax jurisdiction, transfer prices track internal transactions and allocate costs to different activities. In this case, transfer prices are mainly used to evaluate division managers' performance based on profits generated.
They also help coordinate the divisions' decisions to achieve the organisation's goals to ensure goal congruence, make decisions and preserve autonomy. However, for a multinational company with affiliates in different tax jurisdictions, transfer prices serve more than tracking internal transactions for accounting purposes.
They determine tax liabilities of the affiliates in different countries, and hence the liability of the entire multinational. When a part of a multinational organisation in one country sells goods, services or know-how to another part in another country, the price charged is called 'transfer price'.
This may be a purely arbitrary figure, and may be unrelated to costs incurred or operations. Internationally accepted transfer pricing provisions require any income from an international transaction between two or more associated enterprises to be at arm's length price and be comparable to similar transactions among unrelated enterprises.
This means that a company must be able to demonstrate that the price at which it trades with affiliated companies is comparable to the prices and terms that would prevail in similar transactions among unrelated parties.
As inter-company transactions across borders keep growing and becoming more complex, compliance with the requirements of multiple overlapping tax jurisdictions is becoming a complicated and time-consuming task.
At the same time, tax authorities in each country impose strict penalties, new documentation requirements, increased information exchange and audit or inspection.
One of the major arguments against transfer pricing is that it and tax havens, individually and in combination, adversely affect the ability to raise revenues. Research has shown that in some instances, increasing the arbitrary transfer price boosts a multinational's after-tax profit.
This is done without changes to procedures, operations or added value, but by mere change of book entries. Increased profitability arises from tax avoidance. In other words, it is possible for a multinational company to minimise its liability for corporation tax by transfer pricing.
This is legal unless a jurisdiction legislates to prevent the practice. In principle, all income that crosses international borders could be taxed by the country where it originates (the source country) or by the country of residence of the recipients - the home country.
If the two countries taxed such income, double taxation would occur. To forestall this, domestic laws and bilateral tax treaties have provisions to prevent this. Treaties also provide for exchange of information between tax administrators of source and residence countries.
Most treaties among developed countries are based on the OECD Model Treaty. Those between developing countries are more likely to follow the UN Model Treaty, generally more favourable to source countries.
Under the treaties, income is taxed depending on how it is characterised. Source countries ordinarily tax net business income, but only if it is earned by a 'permanent establishment' in the country. By comparison, source countries tax interest, dividends and royalties, if at all, on a gross basis (without regard to deductions for expenses of earning the income), commonly via withholding taxes.
The taxes are generally reduced, sometimes to zero, under treaties. In some jurisdictions, if a company or a branch did not transact business 'at-arm's-length', tax authorities can add to its taxable basis the advantage granted to an affiliated company; or challenge the deductibility of tax losses.
In practice, whether a company has engaged in improper transfer pricing depends on the circumstances of the transaction. Despite the general requirement of 'at-arm's-length', various jurisdictions have in some cases been willing to accept that companies of the same group may interact with one another in a way that independent parties would not.
Developing nations face several layers of overwhelming problems in transfer pricing. Laws may not deal adequately with the issue. The UN reports that transfer pricing regulations, guidelines and administrative requirements of 41 per cent of developing countries do not address services and regulations of two-thirds do not address technology transfers.
Even where laws for monitoring transfer pricing exists, a developing nation may lack the administrative capacity, including specially trained economists, to deal with the problem.
The writer is a business analyst with The Standard Group
In many developing countries, multinational corporations hold a large swathe of the economy - agriculture, manufacturing and tourism being the most visible.
In Kenya, for example, foreign multinationals dominate agriculture, especially horticulture. There is much debate between those who consider globalisation to be a malignant influence on poor nations and those who find it a positive force.
The debate focuses not just on trade, but also on multinational corporations. And one of the most controversial but least understood of a multinational's operations is transfer pricing. This governs transactions among divisions in a company.
For a company operating in a single tax jurisdiction, transfer prices track internal transactions and allocate costs to different activities. In this case, transfer prices are mainly used to evaluate division managers' performance based on profits generated.
They also help coordinate the divisions' decisions to achieve the organisation's goals to ensure goal congruence, make decisions and preserve autonomy. However, for a multinational company with affiliates in different tax jurisdictions, transfer prices serve more than tracking internal transactions for accounting purposes.
They determine tax liabilities of the affiliates in different countries, and hence the liability of the entire multinational. When a part of a multinational organisation in one country sells goods, services or know-how to another part in another country, the price charged is called 'transfer price'.
This may be a purely arbitrary figure, and may be unrelated to costs incurred or operations. Internationally accepted transfer pricing provisions require any income from an international transaction between two or more associated enterprises to be at arm's length price and be comparable to similar transactions among unrelated enterprises.
This means that a company must be able to demonstrate that the price at which it trades with affiliated companies is comparable to the prices and terms that would prevail in similar transactions among unrelated parties.
As inter-company transactions across borders keep growing and becoming more complex, compliance with the requirements of multiple overlapping tax jurisdictions is becoming a complicated and time-consuming task.
At the same time, tax authorities in each country impose strict penalties, new documentation requirements, increased information exchange and audit or inspection.
One of the major arguments against transfer pricing is that it and tax havens, individually and in combination, adversely affect the ability to raise revenues. Research has shown that in some instances, increasing the arbitrary transfer price boosts a multinational's after-tax profit.
This is done without changes to procedures, operations or added value, but by mere change of book entries. Increased profitability arises from tax avoidance. In other words, it is possible for a multinational company to minimise its liability for corporation tax by transfer pricing.
This is legal unless a jurisdiction legislates to prevent the practice. In principle, all income that crosses international borders could be taxed by the country where it originates (the source country) or by the country of residence of the recipients - the home country.
If the two countries taxed such income, double taxation would occur. To forestall this, domestic laws and bilateral tax treaties have provisions to prevent this. Treaties also provide for exchange of information between tax administrators of source and residence countries.
Most treaties among developed countries are based on the OECD Model Treaty. Those between developing countries are more likely to follow the UN Model Treaty, generally more favourable to source countries.
Under the treaties, income is taxed depending on how it is characterised. Source countries ordinarily tax net business income, but only if it is earned by a 'permanent establishment' in the country. By comparison, source countries tax interest, dividends and royalties, if at all, on a gross basis (without regard to deductions for expenses of earning the income), commonly via withholding taxes.
The taxes are generally reduced, sometimes to zero, under treaties. In some jurisdictions, if a company or a branch did not transact business 'at-arm's-length', tax authorities can add to its taxable basis the advantage granted to an affiliated company; or challenge the deductibility of tax losses.
In practice, whether a company has engaged in improper transfer pricing depends on the circumstances of the transaction. Despite the general requirement of 'at-arm's-length', various jurisdictions have in some cases been willing to accept that companies of the same group may interact with one another in a way that independent parties would not.
Developing nations face several layers of overwhelming problems in transfer pricing. Laws may not deal adequately with the issue. The UN reports that transfer pricing regulations, guidelines and administrative requirements of 41 per cent of developing countries do not address services and regulations of two-thirds do not address technology transfers.
Even where laws for monitoring transfer pricing exists, a developing nation may lack the administrative capacity, including specially trained economists, to deal with the problem.
The writer is a business analyst with The Standard Group
Sunday, August 12, 2007
Zambia: Government Lost Out K93 Billion in Tax Concessions
(The Times of Zambia) 12th August 2007
PARLIAMENT yesterday heard that the Government lost K93.78 billion as a result of various tax concessions in the period January to December last year. Finance and National Planning deputy Minister Jonas Shakafuswa said in response to a question from Gwembe MP Brian Ntundu (UPND) who wanted to know how many foreign investors or companies enjoyed tax concessions and how much revenue the Government had lost as a result. Mr Shakafuswa said what should be realised is that concessions were not only offered to foreign investors but also applied to local companies undertaking activities for which tax concessions were given. He explained that nine companies were enjoying concessions under income tax and most of these were in the mining sector. The companies that enjoyed tax concession were First Quantum Mining and Operations, Konkola Copper Mines, Chambeshi Metals, Luanshya Copper Mines, Chibuluma Mines and Kansanshi Mines. The rest that benefited from the concessions were Non-Ferrors Corporation (NFC) African Mining, Mopani Copper Mines and Lumwana Copper Mines. "These companies enjoyed concessions in form of company tax rate of 25 per cent instead of the general company tax rate of 35 per cent. "They also enjoyed concessions in the form of mineral royalty rate of 0.6per cent instead of the general rate of two per cent, which was revised to three per cent in 2007 budget," Mr Shakafuswa said. He also said that in terms of trade related tax concessions over 800 both local and foreign companies were benefitting. Mr Shakafuswa also said 16 companies were currently listed on the Lusaka Stock Exchange (LuSE). He was responding to a question by Mr Ntundu who wanted to know the number of companies listed on the Lusaka Stock Exchange. Mr Shakafuswa also said the nation would be informed on the status of Celtel as regards the listing of shares on the market. He was responding to a question by Chisamba MP Moses Muteteka (MMD) who wanted to know when Celtel would truly list its shares on the market so that Zambians could acquire some. Mines and Minerals development Deputy Minister Maxwell Mwale told the House that Chambishi Copper Smelter would be completed by December 2008 and US$300 million had been spent on the construction of the smelter. He said the company was currently employing 469 members of staff on renewable contracts and once completed 1,500 people were expected to be employed. Mr Mwale was responding to a question by Chipili MP Davies Mwila (PF) who wanted to know when the smelter would be completed and the number of people employed He also disclosed that 260 Chinese were employed at the firm.
PARLIAMENT yesterday heard that the Government lost K93.78 billion as a result of various tax concessions in the period January to December last year. Finance and National Planning deputy Minister Jonas Shakafuswa said in response to a question from Gwembe MP Brian Ntundu (UPND) who wanted to know how many foreign investors or companies enjoyed tax concessions and how much revenue the Government had lost as a result. Mr Shakafuswa said what should be realised is that concessions were not only offered to foreign investors but also applied to local companies undertaking activities for which tax concessions were given. He explained that nine companies were enjoying concessions under income tax and most of these were in the mining sector. The companies that enjoyed tax concession were First Quantum Mining and Operations, Konkola Copper Mines, Chambeshi Metals, Luanshya Copper Mines, Chibuluma Mines and Kansanshi Mines. The rest that benefited from the concessions were Non-Ferrors Corporation (NFC) African Mining, Mopani Copper Mines and Lumwana Copper Mines. "These companies enjoyed concessions in form of company tax rate of 25 per cent instead of the general company tax rate of 35 per cent. "They also enjoyed concessions in the form of mineral royalty rate of 0.6per cent instead of the general rate of two per cent, which was revised to three per cent in 2007 budget," Mr Shakafuswa said. He also said that in terms of trade related tax concessions over 800 both local and foreign companies were benefitting. Mr Shakafuswa also said 16 companies were currently listed on the Lusaka Stock Exchange (LuSE). He was responding to a question by Mr Ntundu who wanted to know the number of companies listed on the Lusaka Stock Exchange. Mr Shakafuswa also said the nation would be informed on the status of Celtel as regards the listing of shares on the market. He was responding to a question by Chisamba MP Moses Muteteka (MMD) who wanted to know when Celtel would truly list its shares on the market so that Zambians could acquire some. Mines and Minerals development Deputy Minister Maxwell Mwale told the House that Chambishi Copper Smelter would be completed by December 2008 and US$300 million had been spent on the construction of the smelter. He said the company was currently employing 469 members of staff on renewable contracts and once completed 1,500 people were expected to be employed. Mr Mwale was responding to a question by Chipili MP Davies Mwila (PF) who wanted to know when the smelter would be completed and the number of people employed He also disclosed that 260 Chinese were employed at the firm.
Monday, August 6, 2007
Kenya: Now Students Ask Leaders to Pay Tax
6th August 2007 (Daily Nation)
Youngsters participating in this year's schools and colleges music festival
have asked MPs to pay taxes and support free primary education.
The leaders who have been criticised for an attempt to award themselves huge
benefits, were advised to fight tax evaders.
According to the students, the country would not need foreign aid if all
Kenyans promptly paid their taxes.
"We are talking about promoting positive behaviour change among Kenyans with
regard to payment of taxes, and to remind Kenyans to pay taxes to enhance
our economic independence," said one of the students.
Health facilities
The category was sponsored by the Kenya Revenue Authority.
In their choral verse, We Demand, Kangubiri Girls Secondary said more tax
revenue had increased supply of drugs to public hospitals.
However, they called for the setting up of more health facilities to serve
young people. "Politicians could do better than always safari ya ng'ambo
(Overseas trips). Payment of taxes could save these problems' said Faith
Githinji, a presenter.
A teacher, Mr Johnson Wanyaguthii, said most Kenyans had a negative attitude
towards payment of taxes and asked the students to step up their campaign
against evaders.
Eight categories of music and poetry were performed in the category at Lions
Primary schools, Menengai High and Melvin Jones. The category attracted a
total of 3,750 students.
Nairobi Aviation College thrilled the audience with their song Lipa Ushuru
(Pay Tax) during the family show.
Winners in the KRA category included: Rongo Success from Nyanza, St Marys
Girls (Rift Valley), Webuye DEB (Western), Carol Academy (Rift Valley),
Golden Elites (Nyanza), Nzoia Sugar (Western), Star of the Sea (Coast),
Kevee Girls and Kipsangui Girls High of Western Province.
Educate country
The authority was commended for sponsoring the presentations aimed at
educating the country on tax payment.
"We should be both economically and political independent and cases of
working under unrealistic conditions by donors would be a thing of the
past," said judge Dan Otiende.
Students of colleges and technical training institutes arrived yesterday
ready for their presentations starting today.
The 10-day festival featuring primary and secondary schools, teachers'
training colleges and universities ends on Thursday with a finalists'
concert sponsored by the Nation Media Group.
Youngsters participating in this year's schools and colleges music festival
have asked MPs to pay taxes and support free primary education.
The leaders who have been criticised for an attempt to award themselves huge
benefits, were advised to fight tax evaders.
According to the students, the country would not need foreign aid if all
Kenyans promptly paid their taxes.
"We are talking about promoting positive behaviour change among Kenyans with
regard to payment of taxes, and to remind Kenyans to pay taxes to enhance
our economic independence," said one of the students.
Health facilities
The category was sponsored by the Kenya Revenue Authority.
In their choral verse, We Demand, Kangubiri Girls Secondary said more tax
revenue had increased supply of drugs to public hospitals.
However, they called for the setting up of more health facilities to serve
young people. "Politicians could do better than always safari ya ng'ambo
(Overseas trips). Payment of taxes could save these problems' said Faith
Githinji, a presenter.
A teacher, Mr Johnson Wanyaguthii, said most Kenyans had a negative attitude
towards payment of taxes and asked the students to step up their campaign
against evaders.
Eight categories of music and poetry were performed in the category at Lions
Primary schools, Menengai High and Melvin Jones. The category attracted a
total of 3,750 students.
Nairobi Aviation College thrilled the audience with their song Lipa Ushuru
(Pay Tax) during the family show.
Winners in the KRA category included: Rongo Success from Nyanza, St Marys
Girls (Rift Valley), Webuye DEB (Western), Carol Academy (Rift Valley),
Golden Elites (Nyanza), Nzoia Sugar (Western), Star of the Sea (Coast),
Kevee Girls and Kipsangui Girls High of Western Province.
Educate country
The authority was commended for sponsoring the presentations aimed at
educating the country on tax payment.
"We should be both economically and political independent and cases of
working under unrealistic conditions by donors would be a thing of the
past," said judge Dan Otiende.
Students of colleges and technical training institutes arrived yesterday
ready for their presentations starting today.
The 10-day festival featuring primary and secondary schools, teachers'
training colleges and universities ends on Thursday with a finalists'
concert sponsored by the Nation Media Group.
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