Kenya’s transfer pricing laws comply with the Guidelines set by the Organization for Economic Co-operation and Development (OECD). They are incorporated within the Income Tax Act 1973.
Arm’s Length Principle
Kenya’s transfer pricing rules are based on the arm’s length principle, meaning related parties must price their transactions as if they were unrelated and dealing independently. This is aligned with OECD Article 9, and the law allows adjustments if profits are not at arm’s length.
Related Party Definition
Under Kenya law, a related party is considered:
- Either person participates directly or indirectly in the management, control, or capital of the other person’s business;
- a third person participates directly or indirectly in the management, control, or capital of the business of both persons; or
- an individual, who participates in the management, control, or capital of the business of one person, is associated by marriage, consanguinity, or affinity to an individual who participates in the management, control, or capital of the other person’s business.
Transfer Pricing Methods
The methods that can be used to determine the arm’s length price in Kenya are:
- Comparable Uncontrolled Price Method
- Resale Price Method
- Cost Plus Method
- Transactional Net Margin Method
- Profit Split Method
The selection of the method is based on the most appropriate principle, taking into consideration factors such as the nature of transactions and the kind of related parties.
Comparability Analysis
Kenya generally follows the guidance on comparability analysis as outlined in Chapter III of the OECD Transfer Pricing Guidelines (TPG), especially after the Unilever Kenya Limited case, which established this as a best practice. Kenya does not prefer domestic comparables over foreign ones and does not allow the use of secret comparables in transfer pricing assessments. The legislation permits the use of an arm’s length range and statistical measures in line with the OECD TPG. However, comparability adjustments are not specifically required under Kenyan law or regulations.
Documentation Requirements
Transfer pricing documentation requirements in Kenya are based on the three-tiered approach set forth by the OECD. This requires multinational groups to:
- Master File;
- Local File, and
- Country-by-Country (CbC) report.
Master File
Multinational enterprise (MNE) groups are also required to submit a Master File, within six months after the end of their reporting year. This file gives a global picture of the group, including its structure, products and services, research and development, supply chains, transfer of intangible assets, group financing, and consolidated financial statements. It also includes tax rulings and any other information the Commissioner may request. The goal is to help tax authorities understand how the group as a whole operates and creates value.
Local File
The Local File focuses on the Kenyan constituent entity. It must also be submitted within six months after the group’s financial year ends. It includes detailed information about the Kenyan entity’s business, its role in the group, management structure, business strategy, and all material related-party transactions (including amounts paid or received). It provides the Commissioner with a deeper understanding of the local operations and how they fit into the global group structure.
Country by Country Reporting
Kenya follows the OECD’s BEPS Action 13 framework for CbC reporting. Multinational enterprise (MNE) groups with total revenues over 95 billion Kenyan shillings must file a CbC report. This applies to groups with a resident ultimate parent entity (UPE) or a constituent entity (CE) in Kenya. The report must be submitted annually within 12 months after the end of the group’s financial year and must include financial activities in all jurisdictions where the group operates. If the UPE is not required to file a CbC report, or its country doesn’t have a proper agreement with Kenya, then a Kenyan CE may have to submit the report instead. Kenya also takes part in the international automatic exchange of these reports.
Advance Pricing Agreements (APA) and Mutual Agreement Program (MAP)
Kenya currently does not have advance rulings which are in fact the tax authority’s decisions on how specific tax rules will play out in a given transaction. However, the tax authority is to still enter into bilateral cooperation with foreign tax authorities via Tax Information Exchange Agreements.
Mutual Agreement Program (MAP)
In Kenya, if a taxpayer observes that they are being taxed unfairly in two countries on the same income (double taxation), they can ask the tax authority for support through the procedure called the Mutual Agreement Procedure or MAP. This is a formal process available under Kenya’s tax treaties. It allows Kenya’s tax authority to engage directly with the other country’s tax authority to find a solution to the dispute.
A taxpayer in Kenya can use MAP for different kinds of tax issues, including transfer pricing, anti-abuse rules, or even cases that have already gone to court. However, if a court in Kenya has already made a final decision, then the MAP process must follow that decision and cannot go against it.
Approach to Transfer Pricing Audits
Kenya’s tax authority actively conducts transfer pricing audits, and every ongoing audit must now include a review of the taxpayer’s transfer pricing practices. KRA has issued large tax assessments of up to USD 50 million and is also cooperating with other countries for information sharing and dispute resolution through MAP.
Penalties
If a company sets wrong prices for tax purposes, there’s no special penalty. But if the tax authority finds this and increases the taxable amount, normal tax penalties and interest apply. If a tax report is filed late, there’s a penalty of 5% of the tax owed, with a minimum of 20,000 shillings.
Interest only applies if the tax is not paid by the deadline. Interest is 1% per month on the unpaid tax, but it won’t go higher than the original tax amount.
Taxation at a Glance
Kenya has 47 counties, each with its local government. Kenya’s tax system includes taxes on business and personal income, a tax on digital services, VAT (a tax on goods and services), customs and excise taxes for imports and certain products, and other fees like stamp duty.
The currency of Kenya is the Kenyan shilling. The official name of the Kenya tax authority is the Kenya Revenue Agency.
The table below provides a summary of the main taxation rates related to businesses:
Tax Type | Tax Rate |
Corporate Tax | 30% |
VAT | 16% |
Withholding tax on dividends to non-residents | 15% |
Withholding tax on interest to non-residents | 5/7.5/15/25% |
Withholding tax on royalties to non-residents | 20% |
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