In 2016, the taxman put flower grower Van Den Berg through an audit and discovered it had been selling a good chunk of farm produce to its Dutch parent company at extremely low prices.
While the audit appeared random, its findings would turn out to be nothing close to that as the Kenya Revenue Authority (KRA) found that the Dutch-owned flower grower had been using clever accounting to declare lower revenues to attract lower taxes.
The investigation revealed that Van Den Berg’s Kenyan operations had been declaring lower-than-expected revenues between 2008 and 2013 because it was selling roses to its Dutch parent firm at prices significantly lower than the market rates.
An analysis of the books indicated that, during the audit period, Van Den Berg (Kenya) Ltd priced each of its rose stems sold to Van Den Berg Holding BV (Netherlands) at €0.10 (Sh12.84).
Records from flower dealers indicate that, in 2008, the price of each rose stem was €0.19 (Sh24.39). This means that Van Den Berg Kenya was selling roses to its parent company at half the market price.
As the two firms are related, it is expected that they have lower prices in mutual dealings.
However, the significant difference in prices used by Van Den Berg showed that the flower grower’s parent company was using the Kenyan subsidiary to suppress profits in Kenya and declare huge earnings in the Netherlands, which has a much lower corporation tax rate than Kenya.
By the time the audit was complete, KRA had not only uncovered a Sh1.3 billion debt owed to it for the five-year period, but also found that Van Den Berg’s Kenyan operation was falsely listed as a medium taxpayer owing to the manipulated revenues.
Van Den Berg was immediately moved to KRA’s Large Taxpayers’ Office while officers sent agency notices to the flower firm’s bankers to recover Sh1.3 billion owed.
In March, High Court Judge Momanyi Bwonwong’a dismissed a case Van Den Berg filed in 2016 to stop collection of the money and to compel the KRA to use the same calculations that the flower grower had used in the period under scrutiny.
Van Den Berg argued in court that it used the resale price method (RPM) to value its roses. It insisted that the method considers all physical attributes of a flower.
KRA used the comparable unit price method (CUP), which looks at how much other organisations buy or sell a flower for.
Van Den Berg insisted that Kenyan laws allow it to choose either pricing system to determine the cost of each rose stem and eventually the amount of taxes due.
Interestingly, Van Den Berg (Kenya) failed to provide auditors with some crucial documents that would have confirmed if it was playing dirty. Some of the documents it gave to the taxman’s number crunchers were in Dutch, which was deemed as a trick to at frustrate tax calculation.
With the suit now dismissed, Van Den Berg could end up paying the Sh1.3 billion debt the taxman is demanding from it.