In recent decades, the increase in globalization and rapid technological advancement has facilitated greater mobility of capital. This trend has created numerous avenues for individuals and corporations to transfer their wealth and associated income to jurisdictions with highly favorable tax systems and robust bank secrecy regulations. Substantial sums of money are held offshore and remain untaxed, often due to taxpayers’ failure to fulfill their tax obligations in their home countries.
In 2022 around $12.6 trillion in offshore wealth was reported to foreign tax authorities through automatic exchange of information. According to the Global Tax Evasion Report 2024 by EU Tax Observatory, 27% of offshore financial wealth was untaxed in 2022, representing 3.2% of world GDP[1]. Over the past decade, there has been a documented 25% increase in offshore wealth. Consequently, jurisdictions worldwide experience significant income losses due to cross-border tax evasion. As of December 2012, the Internal Revenue Service (IRS) in the United States (US) implemented four offshore initiatives, resulting in over 39,000 disclosures by taxpayers and generating revenues exceeding $5.5 billion. According to UNCTAD report (2020), Kenya is among African countries losing about $50Billion every year in illicit financial flows such as tax evasion[2]. This led to the introduction of the Common Reporting Standards(CRS) in Kenya in 2021 to combat tax evasion through off shore accounts.This commentary aims to assess the effectiveness of the CRS in combating tax evasion in Kenya perpetuated through off shore accounts.
Tax evasion through off shore accounts takes various forms. One method involves employing nominee directors to act on behalf of the actual owner of the funds, thereby introducing an additional layer of anonymity as the true owner’s identity remains undisclosed in public records. Another approach is the establishment of shell companies in jurisdictions with stringent secrecy laws, often owned by nominee directors who hold assets and funds without revealing the true beneficial owner. Additionally, layering transactions are employed to conceal funds by transferring them through multiple accounts and jurisdictions, obscuring their source and ownership. This intricate network of transactions makes it challenging to trace the funds. Furthermore, some individuals and corporations resort to hiding funds in offshore accounts through crypto currencies, as transactions can be conducted anonymously or using pseudo accounts, while offshore exchanges may offer additional privacy protections.
In a move to address this malpractice, the Parliament of Kenya approved the Common Reporting Standard (CRS), in 2021, under the principle legislation for Automatic Exchange of Information (AEOI) through the Finance Act 2021. This was a proactive measure in line with global efforts to combat tax evasion. With this, financial institutions, such as banks, investment funds and insurance companies were required to collect and report information on account holders’ financial assets, including interest, dividends, and capital gains. This information helps tax authorities identify and address instances of tax evasion and non-compliance, particularly concerning offshore accounts and assets.
The CRS signifies a notable advancement in international tax cooperation, aiming to combat tax evasion through the automatic exchange of financial information among participating jurisdictions. Its widespread adoption reflects a collective commitment among countries to foster transparency and fairness in the global tax regime. Several nations have progressively implemented the instrument, including the United Kingdom, Germany, France, Australia, Canada, Switzerland, and various others. The United States also adopted the Foreign Account Tax Compliance Act (FATCA), but for the same purpose.
In an effort to comply with this requirement in Kenya, certain banks have already informed their customers about the commencement of the implementation of the CRS. For the Kenya Revenue Authority (KRA), it initiated administrative measures aimed at enhancing the efficiency of information exchange by appointing the Commissioner for Intelligence & Strategic Operations (I&SO) as the designated Competent Authority Office(CAO) for Exchange of Information in 2016. The office was established to furnish comprehensive policy analysis and counsel to the National Treasury regarding all aspects of cross-border taxation, including identifying deficiencies in the international tax legal framework and formulating recommendations for legislative amendments pertaining to cross-border taxation matters.
Implementation of AEOI since 2016 and the CRS in 2021 has yielded tangible benefits in terms of improved tax compliance and revenue collection. According to the Tax Transparency in Africa 2022; Africa Initiative Progress Report, Kenya’s use of exchange of information has resulted in steady increase in revenue gain realized from offshore tax investigation with a recovery of Ksh130 million in 2019, Ksh10.5 million in 2020, and Ksh 985.2 million in 2021[3]. The report also stated that the country’s use of the exchange of information had also increased from one (1) request in 2018 to seventeen (17) in 2019, seventy three (73) in 2020, and one hundred and seventy three (173) in 2021. This accounts for 45% of all requests sent by African countries. This was expected to increase in 2022 after notable improvement was recorded following successful implementation of the CRS in 2021. Additionally, by the end of financial year 2020/2021, KRA exceeded its total revenue collection target to Sh1.669 trillion from the initial target of Sh1.652 trillion.
In conclusion, implementation of the CRS represents a significant step forward in the fight against tax evasion in Kenya that is associated with off shore accounts. Its ultimate success will however depend on continued commitment and collaboration among governments and financial institutions in exchange of financial information, the capacity of tax administration and financial institutions and the impact on taxpayer compliance. By addressing these factors, KRA will steadily strengthen its efforts to combat tax evasion and promote tax transparency in off shore accounts, hence increasing national revenue collection while also complying with international standards of tax management.
[1] Global Tax Evasion Report 2024
[2]Economic Development in Africa Report 2020: Tackling Illicit Financial Flows for Sustainable Development in Africa
[3]African Union & OECD. (2022). Tax Transparency in Africa: Africa Initiative Progress Report.