Tax non-compliance practices by foreign multinational companies and the efficacy of tax law enforcement in Kenya

Abstract

This study explores the tax non-compliance practices employed by foreign multinationals that include transfer pricing (TP), use of tax havens and intercompany agreements. It analyses how these methods are used by foreign multinational companies specifically; Absa, Unilever, Coca- Cola, Safaricom and East Africa Breweries Limited, through legal means to achieve tax avoidance. Furthermore, the thesis examines the existing legislative framework on tax non-compliance by FMNCs operating in Kenya and evaluates the efficacy of the tax law enforcement framework in Kenya for addressing tax non-compliance practices. The statues to be reviewed are the Constitution of Kenya, Income Tax Act, Income Tax (Transfer Pricing) Rules, Income Tax (Country-By-Country Reporting Standards for Multinational Enterprises ) Regulations, Tax Procedures Act. It analyses other aspects of enforcement like capacity and gaps in the enforcement mechanisms. The study has demonstrated that there is a very basic understanding of non-compliance practices by respondents from the authority. However, in the data collection phase, the FMNC’s declined the researcher’s request for interviews after going through the interview questions. The researcher resorted to interview audit firms that carry out audits for the FMNC’s. Information obtained enabled the completion of the thesis. The key finding is that FMNCs are not evading taxes but are involved in tax avoidance practices. This is done through exploitation of loopholes in the legislative framework to minimize taxes payable. This study concludes that the FMNCs under the study namely Absa, Unilever, Coca- Cola, Safaricom and East Africa Breweries Limited are not involved in tax non-compliance practices. The cases of transfer pricing by Unilever, export services by Coca-Cola were all cleared on appeal. Suggestions are made to strengthen legislation to include clear and upto date regulations to cope with emerging trends of TP and build capacity of the tax administration for better enforcement.