Transfer pricing refers to the setting of prices for transactions occurring between associated entities. It is a common practice with globalization and growth in international trade. Transfer pricing manipulation increases the risk of capital flight and shifting of profits by multinational enterprises. Kenya has put up measures to protect her tax base from transfer pricing risks posed by cross-border transactions between related entities, through enactment and enhancement of tax legislation and administration. 

Kenya’s transfer pricing legislation has been enhanced over the years. Section 18(3) of Income Tax Act is the basic legislation governing transfer pricing in Kenya, and has been in the Act since the Act’s enactment in 1973. The Section, however, remained largely untested for several years until the Unilever (Kenya) Limited case that was ruled in 2005. The case ruled in favor of Unilever, based on two main reasons: that there were no regulations to guide the application of Section 18(3) and that Section 18(3) was itself unclear, placing burden of proof on the Commissioner and not on the taxpayer.

Following the judgment in the case of Unilever Kenya Ltd v Commissioner of Domestic Taxes in 2005, Kenya issued the Income Tax (Transfer Pricing Rules) 2006, which heavily borrows from the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines.

There has been subsequent legislation amendment on section 18(3) and other related sections:

• In 2010, the section was amended to eliminate the statement that required the Commissioner to prove that the transactions were arranged in such a way to reduce taxable profit.
• To minimize tax leakage through transfer pricing, section 18(6) was also amended in 2010 to include transactions between individuals who are related by consanguinity or affinity.
• Through Legal Notice No. 54 of 2012, the Commissioner may issue guidelines on application of the transfer pricing methods set out in the Transfer Pricing Rules.
• The Finance Act 2014 expanded the scope to include the dealings between a non-resident and its permanent establishment (PE).
• The Finance Act 2017, introduced section 18A, that brought transactions with taxpayers in preferential regimes within the scope of Transfer pricing (in line with BEPS action 5 on Harmful Tax practices)

These amendments have eased the practical application of the transfer pricing legislation in Kenya. The transfer pricing legislation is now widely applied by both Kenya Revenue Authority (KRA) and the taxpayers in the determination of arm’s length price. Several transfer pricing audits have since been conducted and disputes resolved.

KRA’s transfer pricing audit unit was established in 2009. The Unilever (Kenya) Limited case was among the first transfer pricing audit cases conducted by KRA. This unit has grown to what is now the International Tax Office (ITO) with trained and dedicated staff, from less than 10 officers to the current level of about 40 officers. The unit has ensured adequate training of its staff through in-house training and collaboration with international organizations like the World Bank funded training programs.

Kenya has embraced internationally recognized guidelines namely United Nations (UN) and OECD Transfer pricing guidelines and the OECD Base Erosion and Profit Shifting (BEPS) project outcomes. Some of the developments include:

• Kenya is in the process of reviewing the Income Tax Act and KRA has proposed several amendments to be included in the revised Act to address BEPS issues, like widening the definition of related parties within the meaning of international transactions to include companies in low tax jurisdictions, or tax havens.
• Kenya is in the process of enacting rules regarding transfer pricing documentation to enhance transparency.
• Kenya has already developed a tax return that is meant to ensure that all the required information is disclosed. This is proposed to cover:
• Country by country reporting
• Disclosure of beneficial ownership
• Domestic operations disclosures
• Imposition of penalties on failure to maintain and or avail transfer pricing documentation
• Proposal to widen the scope of PEs to include activities that were omitted previously like dependent agents and commissionaire agents among others.
• Proposal to have an additional method for benchmarking commodities using data from international or domestic commodities markets.
• Proposal to anchor Advance Pricing arrangements (APA) in the legislation
• Kenya has ratified the Mutual Administrative Assistance in Tax Matters (MAC) agreement, which is to be deposited with the OECD, promoting the ability to exchange tax information with other jurisdictions globally.
• Kenya is already in the process of reviewing existing Double Tax Treaties (DTAs), identifying gaps within the DTAs to propose measures to address the gaps identified in the DTAs.
• Kenya has already joined the Global Forum on Exchange of Information and Transparency.
• Kenya is preparing a treaty policy and a treaty negotiation strategy.

KRA has been engaged in many international platforms on transfer pricing and international tax matters. These include; active participation in Regional bodies like the Africa Tax Administrators Forum (ATAF) and the East Africa Revenue Authorities Technical Committee (EARTC), participation in international transfer pricing seminars, having membership and participating in the OECD Working Parties under the OECD BEPS Inclusive Framework and having her staff take part in supporting transfer pricing audits in other countries under the OECD’s Tax Inspectors Without Borders initiative.

KRA has committed resources to support transfer pricing audits through procurement of transfer pricing database for benchmarking studies like TP catalyst and providing office equipment and facilities.

KRA’s ITO is dedicated to keeping pace with the changing landscape in the taxation of cross border transaction.

By Geoffrey Njuguna, International Tax Office, KRA