KRA wins Ksh.1 billion tax evasion case against Chinese firm

The Chinese firm was found to have fraudulently evaded payment and transferred incomes through shell companies to accounts in China, as detailed in an appeal filed by CCCC at the Tax Appeals Tribunal (TAT).

CCCC, a majority state-owned, publicly traded multinational engineering and construction company based in China, engages in the design, construction, and operation of infrastructure assets such as highways, bridges, tunnels, railways, roads, airports, marine ports, and oil platforms.

The TAT upheld the tax assessment and dismissed CCCC’s appeal on 9th August 2024. The case, filed on 25th May 2023, saw the KRA Commissioner for Investigations & Enforcement as the respondent. KRA had conducted an audit on CCCC’s affairs, issuing an assessment on 3rd February 2023 for VAT and income tax. CCCC challenged this assessment, claiming it was erroneous both in fact and in law.

KRA’s audit revealed that CCCC was involved in a complex tax evasion scheme. The company had claimed inflated input VAT for purchases that were either not incurred or unrelated to genuine business activities, using fictitious invoices from fraudulently registered and non-existent companies to reduce tax liabilities.

Evidence presented to the TAT showed that CCCC claimed input VAT for goods and services never supplied. The firm had claimed inflated input VAT from six fraudulently registered companies, whose directors were unaware of these entities’ existence or transactions.

The six companies involved were Dial an Errand Ltd (KShs. 638,251,386), Haru Limited (KShs. 156,532,074), Njafos Holdings Ltd (KShs. 256,932,293), Masaviru Investment Limited (KShs. 157,035,000), Math and Kith Investment Company Limited (KShs. 213,448,586), and Lunza Solutions Limited (KShs. 221,061,000).

These six shell companies (tier 2) would claim input VAT from other shell companies (tier 3), including Benlaz Company Ltd, Hao Yuan International Company Limited, Colila Ltd, Crystal Touch Company Ltd, Akubi Ltd, Homematt Ltd, and Ujenzi Suppliers Ltd. Tier 3 companies would then claim input VAT from further shell companies (tier 4) like Papaya Company Ltd.

For instance, Njafos Holdings Limited’s account signatory, George Makuthi Nderitu, differed from the registered director, Simon Musyimi Musyoki. Similarly, Benlaz Company’s registered director, Suleiman Odhiambo Oganga, claimed his identity was fraudulently used. Colila Limited’s registered director, Lassina Coulibaly, had left Kenya in 2006, and Crystal Touch Limited had been struck off the Registrar of Companies’ records.

The financial transactions trail revealed that these shell companies were paid for construction materials, but the funds were subsequently transferred to USD accounts and then wired overseas, including to China.

The Tribunal concluded that the tax avoidance scheme was proven, noting that CCCC failed to rebut KRA’s fraud and tax avoidance assertions with any evidence. The Tribunal ruled that the company’s transactions did not reflect reasonable commercial activity but an elaborate scheme to evade taxes in Kenya.

It was deemed implausible that all entities involved would adopt similar methods of lacking documentation, converting KShs to USD, and transferring money to China in typical arms-length transactions.