Kenya`s transfer pricing legislation has improved over the years. Section 18(3) of the Income Tax Act is the basic transfer pricing legislation in Kenya and has been in force since the Act was passed in 1973. However, this section went virtually untested for several years until the Unilever (Kenya) Limited case, which was decided in 2005. The case ruled in favour of Unilever for two main reasons: there were no rules for the application of section 18(3) and that section 18(3) itself was unclear and placed the burden of proof on the commissioner rather than the taxpayer. Transfer pricing refers to the pricing of transactions between associated enterprises. This is a common practice with globalization and the growth of international trade. Transfer pricing manipulation increases the risk of capital flight and profit shifting by multinational enterprises. Kenya has taken steps to protect its tax base from transfer pricing risks arising from cross-border transactions between associated enterprises by adopting and improving tax legislation and administration. These changes have facilitated the practical application of transfer pricing legislation in Kenya. Transfer pricing legislation is now widely applied by the Kenya Revenue Authority (KRA) and taxpayers to determine the arm`s length price. Since then, several transfer pricing audits have been carried out and disputes have been resolved.
The Finance Act 2021 (published on 1 July 2021) introduced significant changes to the transfer pricing (TP) regulatory framework in Kenya. For transfer pricing purposes in Kenya, a branch or permanent establishment (PE) of a foreign company is considered to be a separate legal entity from its head office and other branches or permanent establishments of the foreign entity. In accordance with subsection 18(3) of the Income Tax Act and the Income Tax Regulations (Transfer Pricing Rules, 2006), the above-mentioned corporations must document a transfer pricing policy (which governs their business relationships with their non-resident related parties) and make it available to the Commissioner upon request. The main consequence of the expanded definition of control is the definition of related parties with respect to transfer pricing requirements and the application of the presumption of interest. Some of the companies that were previously considered independent are now considered subsidiaries and therefore fall within the scope of TP regulations in Kenya. Kenya has adopted internationally recognized guidelines, namely the United Nations (UN) and OECD Transfer Pricing Guidelines, as well as the results of the OECD Base Erosion and Profit Shifting (BEPS) projects. Recent developments include: KRA has provided resources to support transfer pricing audits by obtaining a transfer pricing database for benchmarking studies such as TP Catalyst and providing office equipment and facilities. For more information on transfer pricing in Kenya, please contact: The Act amended Section 18(A) of the ITA to expand the scope of transactions under Kenya`s transfer pricing legislation. Starting at 1. January 2023, transactions between residents and the following persons who are subject to preferential tax treatment are required to carry out these transactions at market prices – i.e. a related resident; ii.
a non-resident; iii. a related business of a non-resident; and iv. the permanent establishment of a non-resident. Income attributable to the MOU in Kenya is determined according to transfer pricing principles. As mentioned above, a public institution is considered to be a separate legal entity from its head office for TP purposes in Kenya. KRA has been involved in numerous international transfer pricing and international tax platforms. These include; active participation in regional bodies such as the Africa Tax Administrators Forum (ATAF) and the East Africa Revenue Authorities Technical Committee (EARTC), participation in international seminars on transfer pricing, membership and participation in OECD working groups under the OECD Inclusive BEPS Framework and participation of its staff in supporting transfer pricing audits in other countries under the Tax Inspectors Without OECD borders. KRA`s Transfer Pricing Audit Unit was established in 2009. The Unilever (Kenya) Limited case was one of the first transfer pricing audits carried out by KRA.
This unit has now become the International Tax Office (ITO) with a trained and dedicated staff, growing from less than 10 officers to the current level of about 40 officials. The Unit has provided adequate training for its staff through in-house training and cooperation with international organizations such as World Bank-funded training programmes. Following Unilever Kenya Ltd v. Commissioner of Domestic Taxes in 2005, Kenya issued an income tax (transfer pricing rules) in 2006, which draws heavily on the Organisation for Economic Co-operation and Development (OECD) transfer pricing guidelines. Foreign companies operating in Kenya will need to review their commitments to assess and plan for the impact of improving the definition of capital institutions. The Act repealed Section 18B of the Income Tax Act, replacing it added by the Finance Act 2021 for the introduction of country-by-country reporting (CbC) requirements for ultimate parent companies of multinational companies in Kenya that exceed a prescribed gross turnover threshold. The 2022 Finance Act introduces a new Article 18B, as well as new Articles 18C, 18D, 18E and 18F, which include more detailed country-by-country reporting requirements, as well as master and local file requirements. Samuel MwauraT +254 (0) 20 375 2830E email@example.com From 1 January 2022, multinational enterprises (MNEs) based in Kenya (and not owned by another company) with subsidiaries, branches or permanent establishments in other countries will be required to submit an annual country-by-country report/statement to the Commissioner.
Of particular interest will be foreign companies providing services in Kenya, including consulting services, through personnel physically present in Kenya. It is essential that these companies take into account the shorter timeframes for the establishment of a service PE in Kenya and take the necessary steps to ensure compliance with relevant laws and regulations.