Illicit Financial Flows: a Legal Analysis of Tax Avoidance by Financial Institutions in Kenya

Abstract

Illicit Financial Flows and exchequer revenue loss through aggressive tax avoidance by financial institutions are two sides of the same coin. In Kenya, many financial institutions avoid paying taxes through these illicit financial flows. Illicit financial flow (IFF) is an umbrella term that refers to the transfer of illegally obtained monies or the transfer of funds for criminal purposes. The dilemma in tax avoidance rests in the competing interests between individuals' desire to save as much as possible and the state's right to taxes to meet government costs. Tax avoidance becomes more critical to companies, as entities that are at their centre business organisations, and as such, are profit-driven. In recent times, large technology companies such as Google and Apple have been on the spot due to their aggressive tax avoidance techniques such as creative accounting, thin capitalisation, the use of tax havens, and treaty shopping. Kenya loses billions to capital flight through illicit financial flows. This revenue loss is significant in driving Kenya's big four agenda, including enhancing manufacturing from 9.2% to 20%, 100% food security, 100% Universal health coverage, and affordable housing. Illicit Financial Flows are the cross-border transfer of illegally obtained money. This could be through illicit trade, bribery, money laundering, tax evasion, and aggressive tax avoidance. Aggressive tax avoidance leads to revenue loss, which would aid in achieving the country's economic agenda instead of focusing on foreign aid. Aggressive tax planning hinders these efforts and leads to revenue loss. Amongst the perpetrators who aid in illicit financial flows through aggressive tax planning include lawyers, accountants, and tax auditors. The dilemma in tax avoidance rests in the competing interests between entities' desire to save as much profit as possible and the state's right to taxes to meet government costs. This research focuses on the possibility of financial institutions aiding in aggressive tax avoidance by its clients, or even the directors, leading to the country bleeding economically. Laws in place are analysed, and the limitations in the enforcement of these laws, with the help of a case study. Lessons from the case study are then sought to determine whether the laws in Kenya are adequate to deal with illicit financial flows and what recommendations can be made, if any, to combat illicit financial flows in Kenya and strengthen the framework for detection and deterrence of aggressive tax avoidance in Kenya.