How Kenya Revenue Authority may have made massive error

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Embattled Kenyan betting giant SportPesa has “disputed” the astonishing Sh95 billion (£633 million) total that the Kenya Revenue Authority says it owes in unpaid taxes.

The figure, reported by the Daily Nation newspaper in January, is thought to be one of the biggest amounts ever claimed from a company by the Kenyan tax collector. The Daily Nation article was based on a leaked letter from the KRA to SportPesa’s main entity in Kenya, Pevans East Africa, in which it detailed its findings from a preliminary audit of the company’s tax affairs from 2015 to 2019.

SportPesa – through London law firm Schillings – told Finance Uncovered this month the headline Sh95 billion figure was “not a formal finding by KRA or even a formal assessment”. It added that the KRA had “simply [undertaken] an information-gathering exercise” that is still “in its preliminary stages”.

Schillings said its client “disputed” the figure and because the letter was not a formal assessment there was “no question” of it taking it yet to a Tax Appeals Tribunal. Schillings declined to answer detailed questions about the matter, insisting the letter was confidential. The KRA, likewise, declined to answer detailed questions.

Has the KRA made a huge error?

However, an analysis of the KRA’s reported findings by Finance Uncovered suggests the tax authority may have made a massive error in its calculations, overestimating its total by at least Sh69 billion (£460 million). Stripping this error out would leave a preliminary assessment of Sh26 billion (£169 million). The Finance Uncovered analysis of the KRA’s calculation is based on two main sets of documents.

The first is the original article published by the Daily Nation in January which provided many details of the KRA’s private letter to Pevans. This letter reportedly contained breakdowns of how the KRA arrived at the Sh95 billion figure, for example, by examining various company accounts and other documents it had obtained during its audit. The second set of documents was a series of annual company accounts for Pevans between 2014 and 2019. Unlike in the UK, these corporate documents are not usually available for public viewing in Kenya.

By comparing the numbers reportedly used by the KRA in its audit to the actual figures in Pevans’s books – and by examining other important information in the publicly available accounts for SportPesa’s UK operations – it was possible to see a fundamental flaw in the KRA’s assumptions.

This related to the “revenue share” arrangement that SportPesa had set up between its UK and Kenyan businesses. This arrangement had allowed the UK company to bill Pevans for a percentage share of its revenue from Kenyan gamblers.

It was a legal method of sending money from Kenya to the UK.

However, Finance Uncovered has concluded the KRA’s officials applied the revenue share percentage to the wrong revenue figure, thereby massively overestimating the company’s actual turnover. This had two major consequences for the KRA’s tax calculations because they then not only overestimated the amount of corporation tax that the company owed, but also the total of allegedly unpaid betting tax, a separate levy applied on turnover.

The mistake could be hugely embarrassing for the KRA. It is not known whether it has accepted the error as part of the ensuing private correspondence with Pevans.(…)

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