Global transfer pricing guide

Transfer pricing - Kenya

01 Jan 202512 min read
This publication provides a high-level overview of Kenya's transfer pricing rules and outlines who to contact for expert guidance in this area.
Contents

Introduction to transfer pricing in Kenya

  • Section 18(3) of the Income Tax Act, CAP 470 
    This provides for the arm’s length requirement when ascertaining the gains and profits of business where a non-resident person carries on business with a related resident person or through its permanent establishment. 

  • The Income Tax (Transfer Pricing) Rules, 2006 (Kenya TP Rules”) 
    The Kenya TP Rules require any person engaging in related-party transactions to prepare a transfer pricing policy that demonstrates the arm’s length nature of those transactions and to provide it upon request by the Commissioner of the Kenya Revenue Authority (KRA).

  • Section 18A of the Income Tax Act, CAP 470 
    This provides for the arm’s length requirement when ascertaining the gains and profits of business in a preferential tax regime where:
    • A resident person carries on business with a related resident person operating in a preferential tax regime.
    • A resident person carries on business with an associated enterprise of a non-resident person located in a preferential tax regime.
    • A resident person carries on business with a permanent establishment of a non-resident person operating in Kenya where the non-resident person is located in a preferential tax regime.
  • Section 18C and 18D of the Income Tax Act, CAP 470 
    Effective 1 July 2022, Kenya introduces the country-by-country reporting (“CbCR”) compliance obligations for MNE’s whose annual consolidated turnover is at least KES 95 billion (approximately EUR 750 million and above) with respect to CbCR notification form, local file, master file and country-by-country report as follows:
    • CbCR notification - To be filed by the entity that is based in Kenya by the last day of the reporting financial year of that Group.
    • Local file and master file - To be filed by the entity that is based in Kenya within six months following the last day of the reporting financial year of that Group.
    • Country-by-country report (“CbC report”)- To be filed by the entity that is based in Kenya within twelve months after the last day of the reporting financial year of that Group. However, filing exemption applies where the ultimate parent entity (“UPE)” is obligated to file a CbC report in its jurisdiction of tax residence, the jurisdiction where the UPE is based has an international agreement and a competent authority agreement in force, and the Commissioner has not notified the resident constituent entity in Kenya of a systemic failure, if any.
  • Transfer pricing disclosure in the corporate income tax return
    • The Kenya Revenue Authority (“KRA”) issued a public notice on 5 June 2023 introducing a related party disclosure form as part of the annual corporate income tax (“CIT”) return.
    • Taxpayers engaged in related party transactions are required to disclose the following information in their CIT returns:
      • Details of related parties.
      • Comparative financial performance between the local entity and the parent company's or head office’s consolidated results.
      • Details of controlled transactions that generate taxable income.
      • Details of amounts receivable from or payable to related parties.
      • The transfer pricing methodology applied to the controlled transactions.
  • The OECD Guidelines are relied upon by the KRA, courts, and taxpayers as it represents the best practice.

  • The format for TP documentation in Kenya is in line with the OECD Guidelines.
  • Rule 4 of the Kenya TP Rules grants the taxpayer the liberty of choice of the TP method to apply in valuation of the arm’s length price of intercompany transactions.

  • The prescribed TP methods are outlined below:
    • Comparable uncontrolled price (“CUP”) method;
    • Resale price method (“RPM”);
    • Cost plus method (“CPM”);
    • Profit split method (“PSM”);
    • Transactional net margin method (“TNMM”); and
    • such other method as may be prescribed by the Commissioner from time to time, where in his opinion and in view of the nature of the transactions, the arm’s length price cannot be determined using any of the methods contained in these guidelines.
  • The Kenya TP rules does not provide restriction on the geographical location of the comparables to be used. However, reliance is placed on the OECD Guidelines.

  • There is no legal requirement to conduct a fresh benchmarking study every year. However, in line with OECD Guidelines, an update is necessary after a three-year period.
  • Kenya operates a self-assessment regime. The duty of developing a transfer pricing policy solely lies on the taxpayer. Currently there is no penalty for not maintaining a policy, however, failure to have a document in place sets stage for scrutiny from the Commissioner of Domestic Taxes.

  • A company that fails to maintain a TP documentation would be in a disadvantaged position when defending its intercompany pricing with related parties.

  • For this reason, it is highly advisable to have a TP policy should a KRA audit take place, then there is minimal risk of wrongful estimation of the value of intercompany transactions.

Transfer pricing documentation

  • Kenya recognizes the OECD transfer pricing documentation model based on the Master File and Local File (BEPS Action 13) approach.

  • Paragraph 11 of the Eighth Schedule of the proposed Income Tax Bill expected proposes to enact Country by Country (CBC) reporting as a mandatory requirement for entities.

  • Currently the KRA may request a tax payer to submit the following documentations for purpose of transfer pricing.
    • Books accounts;
    • The selection of the transfer pricing method and the reasons for selection;
    • The application of the method, including the calculations made and price adjustment factors considered;
    • The global organization structure of the enterprise;
    • The details of transactions under consideration;
    • The assumption, strategies, and polices applied in selecting the method; and
    • Background information as may be necessary regarding the transaction.
  • All documentations are required to be prepared in or be translated into the English language.
  • The presence of the documentation assists tax authorities in filling of TP questionnaires and proving that the application of the arm’s length principle.

  • The master and local file offer useful information to tax authorities on evaluation of the functions carried out by MNE’s and their associated enterprises and provide comparability data of similar transactions worldwide.

  • The Finance Act, 2022 introduced specific information requirements for each file prescribed in the section 18D of Income Tax Act, Cap 470. Additionally, the Commissioner is expected to issue guidance on the specify manner of filing for the master file and the local file.

  • Country by Country reporting
    1. What is a CbC report?
      A Country by Country (CbC) report is a three tier annual transfer pricing filing requirement, as a minimum standard reporting recommendation of the BEPS Action 13. The CbC reporting standard has been seen to increase information sharing on group operations worldwide and encourage transparency between tax authorities in different jurisdictions. This reporting standard requires ultimate parent entities to disclose financial information relating to their operations in each jurisdiction where the group has a taxable presence.

    2. What is the statutory definition of an ultimate parent entity?
      An ultimate parent entity (UPE) means an entity that is resident in Kenya for tax purposes, is not controlled by another entity and owns or controls a multinational enterprise group. MNE’s which meet the threshold for CbC reporting will be required to file a CbCR notification to the Commissioner within the financial year.

    3. Who does CbC reporting apply to?
      CbCR applies to ultimate parent entities resident in Kenya and part of a multinational enterprises (MNE’s) with a gross turnover of KES 95 Billion, including extraordinary or investment income. The CbC reporting requirement includes an additional compliance requirement to file a master and local file containing standardized information relevant for all multinational enterprise group members and the material transactions of the local taxpayer, respectively.

    4. When is CbC filing due?
      A CbC report should be filed in Kenya within 12 months of MNE’s financial year end, where the ultimate parent entity is resident in Kenya. The requirement to comply with CbC reporting will apply from 2022 and subsequent years of income. For those who are eligible for CbC reporting, it would be prudent to begin preparing and reviewing the Master file and Local file for purpose of filing within 6 months from the group financial year-end.

    5. Why are CbC reports required in Kenya?
      It is now a statutory requirement to provide the tax authority with information relating to the amount of revenue, profit or loss before income tax, income tax paid, income tax accrued, stated capital, accumulated earnings, number of employees and tangible assets other than cash or cash equivalents with regard to each jurisdiction where the group has taxable presence.

      This information enables the tax authority to assess transfer pricing risks, understand resources are allocated and the ascertain extent of income is attributable to Kenya for tax purposes.

    6. Exemption to filing CbC report
      A multinational enterprise group with total consolidated group income of less than KES 95 Billion (in a financial year), where the ultimate parent entity (UPE) is obligated to file a country-by-country report in its jurisdiction of tax residence outside Kenya.

      The resident UPE has an international agreement (bilateral or multilateral) and an exchange of information on CbC reports agreement in force.

      The Commissioner has not notified the resident constituent entity in Kenya of a systemic failure.

      A non-resident parent entity file a CbC report of the group with the tax authority in its jurisdiction of residence, as a requirement.
      The tax authorities of jurisdictions where the group operates have an Exchange of Information agreement.

      The tax authority in a jurisdiction of the where the non-resident parent is resident has not notified Kenya of a systemic failure.
      The non-resident parent entity notifies the tax authority in the jurisdiction of its tax residence that it is the designated surrogate parent entity of the group.

    7. Our comments on the recently introduced CbC reporting requirement in Kenya
      This reporting obligation applies to returns for the year of income 2022 and subsequent years, therefore it would be prudent, for MNE’s resident in Kenya to assess their operations for their financial year to gauge their eligibility to meet the country-by-country report, master file and local file requirements.

      Whereas in certain circumstances some eligible entities are excluded from the country-by-country reporting, the requirement for master and local file reporting will not be extinguished. Therefore, such entities will need to have their master and local files in place for reporting purposes.

      The penalty for non-compliance with the CbC reporting requirement, will be an offense subject to a fine not exceeding KES 1 million, a prison term not exceeding three years or both, upon conviction. We observe that the most applicable provision would be Section 94 of the TPA, which provides that a person commits an offence if the person without reasonable cause fails to submit a tax return or other document required under a tax law by the due date.
  • Online platforms and complex business models offering IT services and have a digital presence in Kenyan market.

  • Limited legal remedies to cope with the rapid changing framework of international business models and treaty agreements which offers legal loopholes for MNC to avoid taxation.

  • Limited risk distributor and contract services / contract R&D arrangements could also potentially be affected, especially where significant people functions are in Kenya.

  • Post-restructuring arrangements may pose certain challenges with respect to the identification of potential comparable in cases where the restructuring implements a business model that is hardly found between independent enterprises.

  • Lack of alignment of transfer pricing outcome with value creation undertaken in the country.
  • Failure to keep a document attracts penalty equal to 10% of tax payable under the tax law to which the document relates, for the reporting period to which the failure relates to a minimum of KES 100,000.

  • Failure to comply with the CbCR filing requirements is an offense which is subject to a fine not exceeding KES 1 million, or a prison term not exceeding three years, or both, upon conviction.
  • Management fees recharges;

  • Demonstration of benefit test, the need for services, proof for services rendered, duplication and the arm’s length mark-up applied by an entity based in Kenya;

  • TP arrangement for engineering, procurement and construction projects;

  • Royalty payment;

  • Rates applied in relation to the development, enhancement, maintenance, protection, and enhancement activities performed by each party, and the development of local market intangibles.

  • Distribution activities;

  • Limited risk distributor and contract services/ contract R&D arrangements, especially where significant people functions are in Kenya;

  • Post-restructuring arrangements;

  • The identification of potential comparable in cases where the restructuring implements a business model that is hardly found between independent enterprises. - Secondary TP adjustments;

  • There are instances where this is performed where the audit on primary adjustments were closed. Initial WHT paid on the TP adjustments is not deductible.

Economic analysis and how to demonstrate an arm’s length result

  • Economic analysis involves searching and selecting comparable transactions or companies considering the quality of data, assumptions and comparability factors and selection of the appropriate economic and statistical data related to a transaction.

  • Paragraph 10(c) of the Income Tax Act (Transfer Pricing Regulations) states that 'where a person avers the application of arm’s length pricing, such person shall avail documentation to evidence their analysis upon request by the Commissioner's.

  • In absence of guidance from the local transfer pricing rules, the tax authorities, in our experience, heavily rely on the OECD TP Guidelines as supplementary guidance but not as a legally binding instrument.

Advance Pricing Agreements (APAs), dispute avoidance and resolution

  • MAP is available in Kenya through the Double Tax Avoidance Agreements for a resident taxpayer if he establishes that an action of KRA or one of Kenya’s tax treaty partners, or both, will result in taxation not in accordance with a tax treaty in force between the two jurisdictions. 
  • This is an alternative method of resolving tax disputes in Kenya outside the judicial process (Courts of law) and Quasi-Judicial Process or Tax Appeals Tribunal (“TAT”).

  • ADR mechanism expedites the resolution of disputes. Parties to an ADR Process include the taxpayer, Commissioner and facilitator.

  • Most TP audits in Kenya are often resolved through the ADR which can be accessed once the case has been filed at the TAT and courts. 
  • There is no Advanced Pricing Agreement (“APA”) regulations in Kenya, however, the law allows for taxpayers to seek a private ruling with respect to transaction needing clarification. 
  • The Commissioner is authorized to execute the assessment and recovery of taxes pursuant to the provisions of the Convention on Mutual Administrative Assistance in Tax Matters.

  • Therefore any multilateral agreement or treaty that has been entered into by or on behalf of the Government of Kenya relating to mutual administrative assistance in the collection of taxes shall have effect in the manner stipulated in such agreement or treaty. 

Contact us

For further information on transfer pricing in Kenya please contact:


Samuel Mwaura
Partner- Tax

E: Samuel.mwaura@ke.gt.com

Parag Shah
Partner- Advisory

E: Parag.shah@ke.gt.com

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