How Kenya can Avoid Tax Evasion Practices by Mining Companies

BE AFRAID, dear countrymen. All the oil prospecting companies operating in the country, such as Tullow oil, are subsidiaries of holding companies incorporated in shadowy tax havens. When mining firms employ harmful tax practices, such as use of tax havens, it portends a Potential tax leakage. Consequently, when the mineral resource is depleted, these multinationals will easily vacate the country to explore elsewhere. Like President Maghufuli has done with Acacia, Kenya must stop these vultures.

kenya-oil
President Kenyatta flagging off early export of Kenya oil from Turkana county. Photo: Courtesy

By gatuyu t.j

In mid-2017, Pombe Magufuli, President of Tanzania, threatened to close mining companies operating in Tanzania. He accused them of not being truthful with their tax obligations on gains accruing from their mining activities. Acacia, a global mining company, bore more of presidential wrath and was issued with a huge assessment of backdated tax liabilities. The case is pending.

Kenya is revamping her extractive industry. The country needs to early on learn from Tanzania to deter tax evasion practices in the sector. This will prevent revenue leakages and ensure the country gains from her resources.

Tax evasion practices by multinationals in extractive industry are a rampant in Africa, making the continent to be unable to benefit from her vast natural resources. A report by a joint team of AU and the United Nations, chaired by Thabo Mbeki, found out that in 2015 alone, African countries lost up to USD 50 billion through tax avoidance schemes.

The extractives industry in Kenya has not been spared from such schemes. A study dated May 2016 by Oxfam, “the Use of Tax Havens in the Ownership of Kenyan Petroleum Rights,”found out that various mining companies in Kenya use intricate corporate structures to hold petroleum rights in order to minimise tax liabilities. This includes owning mining blocks through offshore subsidiaries registered in tax havens. These are all tactics that create room for the companies to erode their Kenyan taxable base and shift profits to affiliates located in offshore low tax jurisdictions.

The study gives examples of mining companies that use offshore entities. These include British Tullow Oil (Netherlands), Africa Oil (Barbados), ERHC Energy (Virgin Island) Octant Energy Corp, Ophir Energy (Bermuda), Swiss Oil (Mauritius), Total (Netherlands), among others.

Kenyans should be worried to have her mining sector dominated by companies employing aggressive tax planning practices. It is an indicator the government may not be able to collect sufficient taxes from the mining industry. The same concern was raised by the Ministry of Energy and Petroleum, in December 2016 in report, titled Social Assessment of the Petroleum Sector in Kenya, which called for raising accountability bar in mining sector.

When mining firms employ harmful tax practices, such as use of tax havens, it portends a Potential tax leakage. Consequently, when the mineral resource is depleted, these multinationals will easily vacate the country to explore elsewhere.

Whenever tax consultancies are accused of facilitating these harmful tax avoidance practices by multinationals, they turn militant and unleash clever sounding clinches’ of how tax avoidance is different from tax evasion, and how tax payers are entitled to arrange their affairs to prevent a large shovel of a taxman into their stores. It does not sink. Exploiting the tax system to prevent the country from accruing appropriate benefit from her resources is immoral.

Silicon Valley giants have perfected the art of notorious and aggressive tax planning. However, such firms are present in the long run and a solution on how to curb these practices may be found. The same leisure cannot be accorded to the extractive industry. Minerals are finite. They can only be extracted once.

It is vital that a country accrues maximum benefit from the windfall. The government should therefore do all is possible to protect the revenue base from the country’s mining wealth. We cannot afford a rat race the countries are doing with tax evading tech firms with extractive industry.

It therefore does not matter whether tax havens are legal or otherwise. They are toxic non-value adding jurisdictions that facilitate harmful and immoral tax practices. They facilitate the creation of shadow long-winded corporate structures, which are nothing but smokescreens to avoid accountability. Entities registered in tax havens should not be allowed to own mining blocks in the country.

Kenya needs to pre-empt a predicament facing President Magufuli. The country should aggressively streamline the regime of taxation in the extractive industry to deter possibilities of tax leakages.The companies operating in the sector should be required to maintain high disclosure requirements in line with international best practices.

This would include requiring them to lift veils of their corporate structures and reveal their ultimate beneficial owners.Increasing transparency is a step to deter potential profit shifting. It will also ensure the country benefits from her mineral resources fully for the benefit of her citizens.

The author the Managing editor of the Gatuyuriana

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