• David & Goliath - Kenya vs. Karuturi Global

    Posted by Jennifer

    8 July, 2013

    Karuturi Global is one of the world’s largest suppliers of cut roses, with an annual turnover of over $100 million. It is based in India, grows flowers in India and several African countries and has recently been found guilty of tax evasion in Kenya.

    Earlier this year, it was discovered that Karuturi had used transfer mispricing to avoid paying USD 11 million of corporate income tax to the Kenyan Government. After shifting its profits through the low-taxing jurisdiction of Dubai by artificially adjusting prices for transactions taking place between different entities within its own multinational group, Karuturi Global Ltd was taken to court by the Kenyan Tax Revenue Authority and found to have broken Kenyan law.

    Roses

    This case was the first time ever that an African country had successfully prosecuted a multinational company for transfer mispricing in a fully public process. In such cases, the imbalance of resources available to developing country governments compared to multinationals makes it something of a David and Goliath battle. Though in this global tax battle - in stark contrast to the Biblical story - developing country Davids rarely win against multinational corporation Goliaths.

    Kenya is a low-income country, with 46% of its population living below the international destitution line of $1.25 per day. Its economy is weak and its tax authority lacks the resources and expertise to hold the multinationals which operate in its territory to account.

    So, while this case can be celebrated as a victory for David (aka Kenya), globally, there are hundreds of other similar cases which have not made it to court. What’s more, the battle for the Kenyan Government is not over because Karuturi has appealed the court’s decision, and it remains to be seen whether Kenya will have the resources to invest in further litigation to ensure that the ruling is upheld.

    In response to the Karuturi case, Dr Attiya Waris, a senior lecturer in tax law at the University of Nairobi, said "Companies like Karuturi are haemorrhaging Africa… Transfer mispricing is robbing Kenyan workers and citizens of access to good public education, health care, transport services and a clean environment, which our government can only provide through proper revenues."

    AusAID water project in Kenya

    According to the Centre for Global Development’s Millennium Development Goal (MDG) Progress Index, Kenya scored 1.5 out of a possible 8, meaning that it has achieved only 1.5 of the 8 targets used to monitor progress towards achievement of the Millennium Development Goals by 2015. While substantial progress has been made in areas of income poverty and access to safe drinking water, Kenya is struggling to reduce child and maternal mortality as well as combatting HIV/AIDS.

    Increased tax revenue, well-spent, could significantly increase the progress of countries like Kenya towards meeting the MDGs. Tax is far more than simply a revenue source for governments; it is a key tool for development.

    The $11 million which Karuturi cheated from the Kenyan Government could have been spent training doctors and midwives, building hospitals and schools and delivering life-saving assistance to people suffering from diseases such as TB and HIV/AIDS.

    This problem is by no means restricted to Kenya nor to Karuturi. It is occurring globally on an alarming scale, with developing nations losing more money to tax evasion by multinational corporations than is given in aid. A global system which allows these injustices to continue clearly needs reform.

    We welcome the commitment of the G-8 to ensure that developing nations will reap the benefits of global tax reforms which are beginning to gain momentum worldwide. But more needs to be done.

    You can take action by calling on the Australian Treasurer to make a stand for the poor in his participation in global forums on this issue, including at the meeting of G-20 finance ministers later this month.

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    Jennifer Vaccari is the Political Engagement Intern with Micah Challenge Australia.