Tax fraud investigations have uncovered a scheme in which a Chinese company fraudulently evaded over Ksh. 1 billion in taxes by channeling income through shell companies to accounts in China.
The fraudulent scheme, known as the ‘missing trader’ tax evasion tactic, was highlighted in an appeal by China Communications Construction Company Ltd to the Tax Appeals Tribunal (TAT). The company sought to overturn a tax assessment of Ksh. 1,047,557,661.
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China Communications Construction Company Ltd, a major state-owned, publicly traded multinational based in China, specializes in designing and constructing infrastructure such as highways, bridges, tunnels, railways, airports, marine ports, and oil platforms.
On August 9, 2024, the TAT upheld the tax assessment and rejected the appeal, following KRA’s submissions filed on May 25, 2023. The Commissioner for Investigations & Enforcement was the respondent in the case.
The KRA audit, conducted on February 3, 2023, revealed that the company had inflated its VAT input claims by using fictitious invoices from non-existent or fraudulently registered companies. This tactic was used to reduce tax liabilities.
The audit demonstrated that China Communications Construction Company Ltd claimed VAT for goods and services that were never supplied. Evidence showed that the company claimed inflated VAT from six fraudulent firms:
- Dial an Errand Ltd: Ksh. 638,251,386
- Haru Limited: Ksh. 156,532,074
- Njafos Holdings Ltd: Ksh. 256,932,293
- Masaviru Investment Limited: Ksh. 157,035,000
- Math and Kith Investment Company Limited: Ksh. 213,448,586
- Lunza Solutions Limited: Ksh. 221,061,000
These shell companies, which had no known physical addresses, were part of a broader network involving tier 3 shell companies. These included Benlaz Company Ltd, Hao Yuan International Company Limited, Colila Ltd, Crystal Touch Company Ltd, Akubi Ltd, Homematt Ltd, and Ujenzi Suppliers Ltd. The tier 3 companies also claimed VAT from tier 4 shell companies, such as Papaya Company Ltd.
For example, Njafos Holdings Limited had discrepancies between the account signatory, George Makuthi Nderitu, and the registered director, Simon Musyimi Musyoki. Similarly, Suleiman Odhiambo Oganga, the registered director of Benlaz Company, claimed his identity had been fraudulently used, and Lassina Coulibaly, the registered director of Colila Limited, had left Kenya in 2006. Crystal Touch Limited had been struck from the Registrar of Companies’ records by that time.
The investigation revealed that shell companies received payments for construction materials but immediately transferred the funds to USD accounts, which were then wired overseas, including to China.
The Tribunal concluded that the elaborate tax avoidance scheme was proven, as KRA’s assertions were not contested, and the company did not provide evidence to counter these claims. The Tribunal observed that the transactions did not represent genuine commercial activity but were part of a deliberate scheme to evade taxes in Kenya.
The consistent use of similar fraudulent practices among various entities indicated a well-orchestrated effort to avoid tax obligations.
Source: Kenya Revenue Authority (KRA)
Matthews Ohotto is an Online Tutorials Blogger with over 10 years experience in Researching, Writing and Publishing the most comprehensive: Latest iTax Tutorials, Latest eTIMS Tutorials, Popular Blog Posts and Latest KRA Updates in Kenya at CYBER.CO.KE on a day to day basis, keeping you informed and engaged with insightful blog content. He is a holder of Bachelor of Business Information Technology (BBIT) Degree from Jomo Kenyatta University of Agriculture and Technology (JKUAT) with key interest in Digital Business Innovation. Need Help? Send an Email to: [email protected] today.