Global Wealth Chains: The Kenyan Experience of the Unwilling Tax Payer

Laila A. LatifGraduate Student, University of Duisburg Essen

UCSIA INTERNATIONAL WORKSHOP Taxation and Trust: Legitimising Redistributive Tax Policies

6-8 May 2015, Antwerp

Introduction

The Argument

• Individuals and companies in Kenya pay taxes.

• However, there is a mismatch between the economic activities carried out in the country by the MNC and what is reflected in its audited books of account.

Reason?

• MNCs will continue to engage with African countries because of their interest in natural resources and will strive to maximise their share of profits.

• MNCs activities in Africa are generally profitable.

• The objective of MNCs is to maximise profits on their operating entities or subsidiaries in Africa and minimise the tax payable to revenue authorities of African countries.

• They are therefore, involved in creating elaborate structures to move profits through their subsidiaries to offshore centres to avoid paying appropriate taxes to African countries.

Moving Profits Through Global Wealth Chains

• Global Wealth Chains (GWC)

• Repackaging and disguising wealth in order to move it out of the spheres of state oversight, regulation and taxation through;

• Shell companies, and

• Subsidiaries

GWC and the STEAL Project

• GWC is a theory that explains how wealth is;

• Created; Complexity of transactions

• Maintained, and through Regulation

• Governed. Innovation capacity among suppliers

Explained through the 5 types of global wealth chains

Global Wealth Chains: How it works.

• Seabrooke & Wigan, 2014

GWC and Information Asymmetry

GWC and Global Value Chains

• The difference between GVC and GWC is like the Yin to the Yang

• A value chain is a string of companies working together to satisfy market demands for a particular product.

• GVC are important in understanding production; removing trade barriers; information and activities are transparent

• GWC work to hide, obscure and relocate wealth.

• GWCs are further facilitated by Double Taxation Agreements.

How certain provisions of DTAs result in GWCs: The Kenyan Experience

• Permanent Establishment

• Affiliates

• Source rules

• E-Commerce

• Management Fees and Royalties

• Accountability

GWCs: Legitimacy Issues

• No law/rule, no wrong: The case of Unilever Kenya Limited versus Commissioner of Taxes: The state lost the TP case against the MNC because of the lack of clear TP rules

• Subsidiaries

• Intellectual Property Law on royalties and Contract Law

Effect on Citizens Level of Trust: Different Perspectives from Legal Officers and Farmers at the Coastal Province

• Same directors, different company names; money moving in circles

• Example: Company buying sugar cane from farmers at a different rate than what is indicated on the invoices and the expense accounts

• Moving goods between parent company and subsidiaries through a tax haven

• Shareholders are companies registered in tax havens

• Inconsistent tax legislation

• Engaging in corruption;

• Bribery at official level;

• Campaign financing

Conclusion

• Is a law on access to information sufficient to address the concerns of tax evasion practices in Kenya?

• Can the slow move towards full decentralisation in Kenya provide room for MNCs to further evade taxes?