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12 September 2023

Kenya revamps Transfer Pricing rules

  • New draft Transfer Pricing rules introduced in Kenya reflect recent changes in the income tax law and will eventually replace rules introduced in 2006.
  • The new rules are generally modeled after international transfer pricing guidelines, published by the Organisation for Economic Co-operation and Development.
  • Although the new rules will increase compliance obligations for multinational enterprises, they also provide needed clarity.

Overview

Kenya's Cabinet Secretary for National Treasury, on 4 September 2023, issued Draft Income Tax (Transfer Pricing) Rules, 2023, for public comment. These new rules are intended to align with the Finance Act, 2022, which made a myriad of changes to the Income Tax Act section on related-party transactions, including introducing Country-by-Country Reporting (CbCR) requirements for multinational entities with operations in Kenya. (Refer to our previous Global Tax Alert on this: Kenya introduces Country-by-Country reporting requirements, 26 July 2022.) The Draft TP Rules are largely modeled on the Organisation for Economic Co-operation and Development (OECD) Guidelines. Upon enactment, they will replace the existing Transfer Pricing Rules, which were introduced in 2006.

Detailed analysis

Some of the key proposals contained under the new Transfer Pricing (TP) Rules include:

1. Expanding the scope of transactions subject to a TP review — currently, transactions listed as subject to these TP rules include:

  • The sale, purchase or lease of tangible assets
  • The transfer, purchase or use of intangible assets
  • The provision of services
  • The lending or borrowing of money
  • Any other transaction that may affect the profit or loss of an enterprise

The Draft TP rules propose to expand the scope of transactions that are subject to TP to also include:

  • Insurance and reinsurance transactions
  • Transactions involving derivatives
  • Cost-contribution arrangements
  • Business restructuring or reorganization, irrespective of whether it has any bearing on the financial position of the entity involved
  • Financial transactions including guarantees, the purchase or sale of marketable securities, any type of advances and deferred payments or receivables.

The main aim is to align the TP rules with the Income Tax Act changes and clarify the transactions that qualify as related-party transactions to curb tax avoidance through repatriation of profits.

2. Enhancing the information in the local files to add a detailed description of the controlled transaction, including: the parties involved, transaction values, settlement currency contractual terms and trading models, the amounts of the intragroup payments or receipts for each related party transaction, and the jurisdiction of the parties involved

3. Specifying commodity transactions that are in-scope for TP, including agricultural products, solid or gas materials, hydrocarbons, derivatives and natural mineral or any other good for which a publicly quoted price is available

For the export or import of these commodities, the publicly quoted price on the date of shipping the goods will be considered the arm's-length price. However, evidence can be provided to show any appropriate adjustments to that quoted price consistent with the arm's length principle.

4. Empowering the Commissioner to request additional information to support transfer prices, such as financial statements for parties to the transactions, segmented reports, details and rationale for the selection of the allocation keys, allocation schedules showing how the financial data used in the local file ties with the annual financial statements, and summary schedules of relevant financial data for comparables used in the analysis and sources from which this data was obtained

Outlook and implications

This revision of TP Rules in Kenya is expected to result in additional compliance requirements for multinational enterprises (MNEs). But, it also brings increases clarity on TP applicability in Kenya and aligns with the OECD Guidelines as the global best practice.

As MNEs anticipate the final rules, it would be prudent to proactively review their global operations and tax reporting to align with their economic value chain. This will also call for enhanced consistency and transparency in the reporting and documentation of MNEs' economic activities globally.

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For additional information with respect to this Alert, please contact the following:

Ernst & Young (Kenya), Nairobi

Ernst & Young Société d'Avocats, Pan African Tax — Transfer Pricing Desk, Paris

Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London

Ernst & Young LLP (United States), Pan African Tax Desk, New York

Published by NTD's Tax Technical Knowledge Services group; Carolyn Wright, legal editor

Document ID: 2023-1509

 

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