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Last Updated: Tuesday, 24 July 2007, 08:30 GMT 09:30 UK
Companies 'looting' a continent
By Fran Abrams
BBC File On 4

Kenyan rose
The Kenyan government says some flower companies under reported profits

Gordon Brown has signalled he wants to see poor countries develop through trade rather than aid.

The new Prime Minister has even appointed a minister with joint responsibility for the two areas.

But charities are planning a major campaign that they believe will expose a flaw in the plan.

While major British companies are investing in the developing world, much of their profit is still banked elsewhere.

'Capital flight'

BBC Radio 4's File on 4 has learned that almost 100bn a year is taken out of Africa through accounting practices - several times what the continent receives in aid.

Charles Abugre, head of policy and advocacy for Christian Aid, said this capital flight amounted to "the looting of the continent".

"If we can't deal with it, there's no way we can conceive of poor countries detaching themselves from aid dependency," he said.

"The issue is slowly coming to the fore. It is the missing link in the whole of international development campaigning."

Reporting from Kenya on the activities of foreign companies there, File on 4 has discovered evidence of questionable accounting practices - both legal and illegal.

Because of the way Kenyan tax laws have evolved, foreign companies can quite lawfully contribute very little in the way of taxes to the country's economy

We want our sisters to stop their corporate citizens who may not be paying their due taxes here
Mukhisa Kituyi
Minister for Trade and Industry

And some other international companies have been found to have acted illegally in falsely declaring amounts of tea that are being exported to the UK.

'Under-reporting'

In Mombasa, Kenya's main port town, the tea board has an official working with customs officials to investigate some startling discrepancies.

Kenya's official export statistics say almost 50 million kilos of tea left there in 2005 bound for Britain.

But the British import statistics showed 75 million kilos - one and a half times as much - arriving here from Kenya.

A former head of domestic tax for Kenya, Jack Ranguma, told the programme he believed the mismatch was created by customs fraud.

In short, companies shipping tea to the UK were under-reporting exports in order to avoid paying tax, he said.

"This shows two things," he said. "One, there is a great deal of corruption in Kenya, which is why they are able to prepare documentation which are not consistent with the figures. But more importantly, the companies involved are transferring income.

"In bald terms what they are doing is to deny Kenya that tax revenue."

'Dishonourable mischief'

And the country's Minister for Trade and Industry, Mukhisa Kituyi, called on developed countries to put pressure on companies to behave.

"We want our sisters to stop their corporate citizens who may not be paying their due taxes here," he said. "That that's one of the ways of enhancing our bilateral friendship."

He also said Kenya was trying to increase its capacity to prevent these practices from depleting his government's resources.

"I think we'll catch up with them if that's what's happening," he said. "If we find any dishonourable mischief we'll be heading towards it."

Task force

But Mr Ranguma, who retired a year ago, expressed doubts about whether the Kenyan government had the commitment and the resources to tackle illegal trade practices.

He told the programme he had also discovered widespread under-reporting of profits by flower companies, many of which are owned by Europeans.

"I formed a task force to audit the flower companies and it did come up with some preliminary results that pointed towards suppression of income," he said.

Matters about tax are a matter for the Kenyan government
Ray Kyles
Acting British High Commissioner

"If you do not declare the full value of income that you have earned as a business, it means you are underpaying taxes. But I left office before I concluded the investigation and I understand a number of people have since been moved from it."

What Mr Ranguma had uncovered was the illegal use in Kenya of a legitimate practice known as "transfer pricing" - the means by which firms value their goods for tax purposes when they move them across international borders.

In effect, this allows companies to undervalue their products when they leave Kenya and to place their profits elsewhere.

British exports

When asked what had happened to the investigation, Mr Kituyi promised to raise it with the finance minister.

But File on 4 found there were also perfectly legal accounting practices which allowed British firms to register their profits outside Kenya.

Britain's acting High Commissioner to Kenya, Ray Kyles, said it was not the job of foreign governments to encourage their corporate investors to pay tax.

"Matters about tax are a matter for the Kenyan government," he said. "Our role here is to recognise the advantages to Britain of increasing its exports and in helping British companies look for opportunities overseas.

"We think there's a win here."

Learn more about this story on File on 4, broadcast on BBC Radio 4 on Tuesday 24 July 2007 at 2000 BST and again on Sunday 29 July 2007 at 1700 BST.

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