Taxing authority and tax law

• Tax authority: Kenya Revenue Authority (KRA)
• Tax law: Income Tax Act (Cap 470, Laws of Kenya) and the Income Tax (Transfer Pricing) Rules 2006 are the applicable regulations

Relevant regulations and rulings

Section 18(3) of the Income Tax Act provides: “Where a non-resident person carries on business with a related resident person and the course of that business is so arranged that it produces to the resident person either no profits or less than the ordinary profits which might be expected to accrue from that business if there had been no such relationship, then the gains or profits of that resident person from that business shall be deemed to be the amount that might have been expected to accrue if the course of that business had been conducted by independent persons dealing at arm’s length.”

For the purposes of subsection (3), a person is related to another if:

• Either person participates directly or indirectly in the management, control or capital of the business of the other
• A third person participates directly or indirectly in the management, control or capital of the business or both
• An individual, who participates in the management, control or capital of the business of one, is associated by marriage consanguinity or affinity to an individual who participates in the management, control or capital of the business of the other

The Transfer Pricing guidelines apply to:

• Transactions between associated enterprises within a multinational company, where one enterprise is located in, and is subject to tax in Kenya, and the other is located outside Kenya
• Transactions between a permanent establishment and its head office or other related branches, in which case the permanent establishment shall be treated as a distinct and separate enterprise from its head office and related branches.

OECD guidelines treatment

The Income Tax (Transfer Pricing) rules provide for the application of the OECD methods in determining the arm’s length pricing.

Priorities/pricing methods

Rule 4 of the aforesaid rules provides that a tax payer may choose to employ in determining the arm’s length price from among the six methods as follows:

• Comparable Uncontrolled Price (CUP) method
• Resale price method
• Cost price method
• Profit split method
• Transactional net margin method
• Such other method as the commissioner for Domestic Taxes may prescribe

Transfer pricing penalties

There are no specific TP penalties. However, the Commissioner for Domestic Taxes can conduct an audit and make adjustments in the taxable profit and demand tax where applicable. Any tax due and unpaid tax in a transfer pricing arrangement is deemed to be additional tax for purposes of Sections 72D, 94 and 95 of the Income Tax Act.

• Section 72D of the Income Tax Act provides that “ when any amount of tax remains unpaid after the due date, a penalty of 20% shall immediately become due and payable”
• Section 94 of the Income Tax Act provides that ‘late payment interest of two per cent per month or part thereof shall be charged on the amount, including the penalty remaining unpaid for more than one month after the due date until the full amount is recovered’.
• Section 95(1) provides that if, for a year of income, the difference between the amount of tax assessed on the total income of a person and the amount of the estimate of the tax chargeable contained in a provisional return of income made by that person in respect of that year is greater than ten per cent of that estimated tax, interest at the rate of two per cent per month shall be payable on the whole of the difference between the tax assessed and the tax estimated.

Penalty relief

There is no specific penalty relief for Transfer pricing arrangements.

Documentation requirements

The Commissioner for Domestic Taxes may, where necessary request a person to whom these rules apply for information, including books of accounts and other documents relating to transactions where the transfer pricing is applied. Such documents shall include information relating to:

• The selection of the transfer pricing method and the reasons for the 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 the transaction under consideration
• The assumptions, strategies and policies applied in selecting the method
• Other background information as may be necessary regarding the transaction

The books of accounts and other documents shall be prepared in or be translated into English language, at the time the transfer price is arrived at.

Where a person avers the application of arm’s length pricing, such person shall:

• Develop an appropriate transfer pricing policy
• Determine the arm’s length price as prescribed under the guidelines provided under these rules
• Avail documentation to evidence their analysis upon request by the commissioner

Documentation deadlines

The deadline for preparing documentation is the same as the deadline for filing the tax return.

Documentation must be provided upon request.

Statute of limitations on transfer pricing assessments

According to Section 56(3) of the Income Tax Act, the statute of limitations for TP assessments is seven years after the relevant year of income unless the Commissioner has reasonable cause to believe that fraud or gross or willful neglect has been committed in connection with, or in relation to, tax for a year of income.

Return disclosures/related-party disclosures

According to the corporate tax return format, the tax payer is obliged to declare the following:

• Name of the related party/parties outside Kenya
• The address of the related parties

Audit risk/transfer pricing scrutiny

Audit risk can be characterized as high. The KRA has commenced TP audits and is requesting for TP policies for scrutiny.

APA opportunity

There are no specific APA rules.

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