The Kenya Revenue Authority (KRA) has successfully upheld a tax assessment of KSh1.05 billion against China Communications Construction Company Limited (CCCC), a state-owned multinational engineering and construction company from China. This judgment, delivered by the Tax Appeals Tribunal (TAT), underscores Kenya’s commitment to cracking down on complex tax evasion schemes, particularly those that involve international entities.
Overview of the Case
The case revolved around a sophisticated value-added tax (VAT) fraud known as the ‘missing trader’ tax evasion scheme. According to the KRA, CCCC was involved in a scheme that involved wiring incomes through shell companies to bank accounts in China, effectively sidestepping Kenyan tax obligations. The Commissioner for Investigations & Enforcement, representing the KRA, highlighted this practice during the proceedings, emphasizing the use of fictitious invoices and transactions with non-existent companies to inflate input VAT claims.
Audit and Assessment
The KRA’s investigations, which culminated in an audit of CCCC’s financial activities, revealed significant discrepancies in their tax declarations. On February 3, 2023, the KRA issued a tax assessment to the company for VAT and income tax liabilities. However, CCCC contested this assessment, asserting that the audit was fundamentally flawed in both fact and law. The company filed an appeal with the TAT on May 25, 2023, seeking to overturn the tax assessment.
Findings and Evidence
The TAT’s investigation uncovered a web of deceit involving six shell companies, which included Dial an Errand Ltd, Haru Limited, Njafos Holdings Ltd, Masaviru Investment Limited, Math and Kith Investment Company Limited, and Lunza Solutions Limited. These companies, devoid of legitimate business activities, were instrumental in inflating VAT claims on behalf of CCCC. The evidence presented showed that directors of these entities were often unaware of their supposed involvement or the transactions in question.
Further complicating matters, the audit traced transactions involving these tier-2 shell companies to additional layers of fictitious businesses (tier-3 and tier-4), such as Benlaz Company Ltd, Hao Yuan International Company Limited, Colila Ltd, and others. These entities were used to further inflate VAT claims and obscure the financial trail.
Tribunal’s Ruling
The Tribunal, after thoroughly examining the evidence, ruled in favor of the KRA. The Tribunal stated that the totality of CCCC’s transactions did not reflect genuine commercial activity but rather an elaborate scheme to evade taxes. The Tribunal noted, “The appellant failed to address the issues of fraud and tax avoidance schemes raised by the respondent’s witness.” The ruling emphasized that the burden of proof had shifted to CCCC to disprove the KRA’s assertions, which the company failed to do.
Moreover, the Tribunal found it implausible that all parties involved in the transactions would simultaneously lack documentation, convert Kenyan shillings to USD, and transfer funds to China. Such patterns were deemed inconsistent with typical arm’s length business dealings.
Implications
This ruling marks a significant victory for the KRA, setting a precedent for future cases involving international firms operating in Kenya. It demonstrates the agency’s resolve to pursue tax evasion aggressively, regardless of the complexity of the schemes employed. For multinational companies, the ruling serves as a stark reminder of the importance of maintaining transparency and compliance with local tax laws.
As Kenya continues to bolster its efforts to combat tax evasion and enhance its revenue collection mechanisms, cases like these underscore the importance of robust regulatory frameworks and vigilant enforcement to safeguard the nation’s financial integrity.
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