The Kenya Revenue Authority (KRA) has over the years battled phantom traders registered as taxpayers in its iTax system who file fictitious invoices to deny the government the much-needed revenue.
These phantom traders, popularly known as ‘missing traders’, are a form of tax fraud syndicate where a taxpayer uses several registered business names for fictitious invoicing. In a missing trader scheme, fictitious invoices are generated to depict a business transaction whereas there is no actual supply or movement of goods and services. The invoices are generated to inflate the cost of sales thereby reducing tax payable.
The scheme appears to delink and hide the final economic beneficiary of the purchases and the net effect is that the fictitious invoices are used to claim purchases to reduce tax liability, evade payment of taxes, or claim tax refund.
Only genuine invoices are admissible for claiming input costs under Section 17 of the VAT Act since a trader cannot purport to sell that which they have not acquired.
In a big win for the KRA recently, the tax appeals tribunal dismissed an appeal filed by China Communications Construction Company (CCCC) Ltd, after holding that six traders alleged to have supplied goods to the Chinese firm did not make any supplies or were not aware of the transactions.
The taxman submitted before the tribunal that the firms used in the scheme were used to generate fictitious invoices in a bid to minimise the Chinese construction firm’s tax liability.
Detailed evidence showed that the Chinese firm claimed inflated input VAT from six registered companies whose directors, as indicated in the company profiles, were not aware of the existence of such companies as well as purchases and financial transactions.
The Tribunal further held that KRA’s testimony showed that the totality of the firm’s transactions did not support a reasonable commercial transaction but was instead an elaborate scheme to avoid payment of tax in Kenya.
“Moreover, it is also not possible or common in a typical arms-length transaction that all the traders and entities who were doing business with the Appellant (CCCC) could have adopted the same modus operandi of lacking documents, converting its Kenya shillings to US dollars, and transferring its monies to China,” the tribunal held.
The six companies named in the transactions are Dial and Errand Ltd, which claimed to have supplied goods worth Sh638 million, Haru Limited (Sh156.5 million), Njafos Holdings Ltd (Sh256.9 million), Masaviru Investment Limited (Sh157 million), Math and Kith Investment Company Limited (Sh213 million), and Lunza Solutions Limited (Sh221 million).
The firms, according to the tribunal, were shell companies with no known physical addresses and location, but they were used to claim input VAT of various amounts in hundreds of millions each from other shell companies.
Njafos Holdings Limited, for example, had claimed input amounting to Sh214 million from companies namely Benlaz Company Limited, Hao Yuan International Company Limited, Colila Limited, Crystal Touch Company Limited, and Akubi Limited.
The commissioner of Intelligence at KRA said he summoned the directors of these companies who recorded statements and the fraud was unearthed.
The tribunal was informed that the registered director for Benlaz Company, Mr Suleiman Odhiambo Oganga, stated that his identity had been used fraudulently to register the company and that he was unaware of any transactions between Benlaz Company and Njafos Holding Limited.
Mr Suleiman Mutua Ngela, the registered director for Akubi Limited, said he was a student doing casual jobs in Nyeri and that his identity had been used fraudulently to register the firm. He said was not aware of any transactions between Akubi Limited and Njafos Holding Limited.
As for Colila Limited, the director, Mr Lassina Coulibaly, said he arrived in Kenya and departed in 2006 based on the travel history from the Immigration Department.
The KRA added that Crystal Touch Limited was struck out from the register of companies.
The Chinese firm stated that it purchased a lot of materials for use in its line of business, which allowed it to claim input VAT from the transactions.
But KRA dismissed the claims, saying there were supplies or services as stated but the transactions were created for the sole purpose of transferring money to China and other overseas destinations.
The taxman said that the recipients of these funds would immediately transfer the money from the Kenya shillings account to their respective dollar accounts and money was sent out of the country, mainly to companies in China with no corresponding imports in the business names.
Further, the KRA said CCCC failed to furnish the Commissioner of Intelligence with delivery notes that bore comprehensive details regarding the delivery of the goods, and the suppliers themselves were frivolous and not anchored in law.
The tribunal said the law places the burden of proof on the taxpayer at all times and it was upon the Chinese company to provide evidence on the transactions it was claiming.
Further, the tribunal said the Chinese company did to address the issues of fraud and tax avoidance schemes when it was raised by the Commissioner of Intelligence.
The tribunal said the moment the KRA alleged that the construction firm was involved in an elaborate tax avoidance scheme, the burden of proof shifted to the company which was now required to provide evidence disputing the claims.
“The Tribunal finds that the respondent’s testimony showed that the totality of the Appellant’s transactions did not support a reasonable commercial transaction. It was instead an elaborate scheme to avoid payment of tax in Kenya. The Appellant’s failure to discharge the burden of proof that had shifted back to it to show that it was not involved in a tax avoidance scheme was not discharged,” the tribunal chaired by Eric Nyongesa Wafula said while dismissing the appeal by the Chinese firm to quash a demand of Sh1 billion.
The tribunal said the Commissioner was justified in its tax assessments having held that the Chinese firm was involved in an elaborate scheme to avoid tax.
