By Kurian Musa
East African Breweries Limited (EABL) a subsidiary of London based Diageo PLC is under scrutiny with fresh allegation of possible tax avoidance according to a petition filled at Kenya’s National assembly.
The petition by Gem Member of Parliament Jakoyo Midiwo alleges that the Nairobi Stock Exchange listed firm owning the largest shares in the Diageo PLC (50.03%) against public shareholding (49.97%) could be involved in a scheme to move out of the country quietly.
Over 3.5 Million employees fate hang in balance due to questions of significant or financial administrative irregularities that prejudice the company as a going concern, creating apprehension in the public.
A forensic investigation has been called for by a competent Independent authority with a view of safeguarding public investment and public interest at EABL.
“EABL’s continued existence as a going concern in the short term is questionable. Its balance sheet is wanting. The company has been engaging in “creative” accounting to deceive the public and the regulator,” reads part of the petition.
It has emerged that the current assets of EABL as at June 3oth, 2015 were valued at Sh 25 billion against the current liabilities of Sh 24 billion indicating a possible cash flow and liquidity challenges.
The Capital Markets Authority (CMA) , an independent regulator under the Capital Markets Act has been urged to move swiftly to examine the activities of EABL and Diageo as they trade in the Nairobi Bourse (NSE).
At the same time , Kenya Revenue Authority has been urged to investigate the pricing arrangements between EABL and Diageo PLC, and cause recovery of monies structured with intention of tax avoidance.
Figures shows that for the same period the non-current assets were valued at Sh 42 billion against non-current liabilities of Sh 28 billion, an indication that the firm was facing huge liquidity problems leading to massive borrowing to finance other debts and hoodwink the regulator.
The company is feared to be off-loading its fixed assets with aim to freeze its activities in Kenya. EABL is said to have sold 15 acres at its Ruaraka headquarters, and its glass bottle manufacturing subsidiary company.
Information available shows the firm has sold its Kisumu, Mombasa, Nairobi, Thika Depot, Garden City Mall, the head office land and building, the canteen and the bottling plant among others.
“The firm has also been transferring deposits from local banks to the UK and other EU Nations, while borrowing heavily locally,” Kelvin Wanderi Kinyua said in a sworn statement presented in Parliament.
The whistle blower, Mr Wanderi pointed out that local staffs believe the European investors may be intending to freeze the company, dispose the most of its local assets such as land and buildings, stealthily repatriate revenues to Europe and then leave it as a financial skeleton.
Transfer Pricing and Tax Avoidance
Damning allegations, points to a possible engagement of EABL in transfer pricing and tax avoidance practices through its biggest Shareholder Diageo PLC. The Aim is to transfer profits to the UK which has favorable tax regimes. The whistle blower says Kenya may lose government tax revenue.
Despite Section 85 of the Tax procedures Act, 2015 giving the Kenya Revenue Authority (KRA) powers to investigate pricing arrangements, between local units of multi-nationals with their parent companies and overturn any that it deems to have been structured with the intention of avoiding tax, the Commissioner is yet to initiate any investigations.
Intrigues in the financial statements for EABL for the financial year 2014 and 2015 can shed light on the malpractices relating to tax avoidance, says the petitioner. For instance, during the year ending June 30th, 2014, EABL had net revenue of Sh 60 billion and Sh 64 billion for 2015, but tax remitted to government was Sh 3.5 billion and Sh 4.6 billion for the financial years respectively.
“The amount of tax remitted to the Kenya Revenue Authority does not correspond with their net revenues for the financial years 2014 and 2015 indicating a possible engagement in tax evasion practices in clear violation of the Tax Procedures Act, 2015,” reads the dossier.
Further, EABL is said to be engaging in reducing its administrative expenses as an attempt to reduce tax payable to government. In 2009, Gem MP Jakoyo Midiwo led petition reveals that EABL retrenched about 200 people in a restructuring process that was inflated to about Sh 558 million.
And in 2014, the firm axed job marking a third retrenchment in five years. EABLE alleged that the layoffs would make the company reduce its operation costs. The company is said to have declined taking up more jobs desoite the recent changes in taxation laws to exclusively favour mass production of low-quality beers, an intention to reduce income tax payable to the government.
Top management of EABL remains a preserve for the foreigners, and most key decisions on investments, divestiture, and procurement, hiring and firing are made in Europe by the foreign investor in total disregard of local laws and local shareholders. Local traders are denied doing business with the brewer, despite most local’s capability to undertake major supplies, Diageo PLC runs the show leaving Kenyans with menial jobs.
The Leader of Minority in National Assembly Jakoyo Midiwo will be once again leading law makers to look into the private and public companies facing financial difficulties due to mismanagement and other irregularities which can be avoided had the national institutions like Parliament intervened in good time, just like in the case of Kenya Airways, Chase Bank, Imperial Bank, and Uchumi Supermarket.
The government is also being asked to offer tax incentives to local alcoholic manufacturing firms to thrive, especially those owned fully by Kenyans.
Auditor General is invited through the petition to carry out an audit in the claims of inaccurate financial statements by EABL aimed at tax avoidance.
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