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20 August 2025

Kenya introduces Advance Pricing Agreements

  • Through the Finance Act, 2025, effective from 1 January 2026, Kenya has introduced a formal Advance Pricing Agreement (APA) framework to align with the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) Pillar Two, addressing dispute prevention and resolution between multinational enterprises and the Kenya Revenue Authority (KRA).
  • APAs will be valid for a maximum of five consecutive years, and the KRA can invalidate an agreement if there is a misrepresentation of facts, emphasizing the importance of accurate and transparent disclosures.
  • Detailed regulations are expected to be issued within six months from the effective date.
  • Affected entities should prepare to leverage the APA mechanism for proactive risk management and dispute avoidance, fostering a cooperative relationship with the KRA as they await the publication of detailed APA regulations.
 

Executive summary

The Finance Act, 2025, gazetted on 27 June 2025, has introduced a formal Advance Pricing Agreement (APA) framework in Kenya under Section 18G of the Income Tax Act (ITA), effective 1 January 2026. The regime allows taxpayers to agree in advance with the Kenya Revenue Authority (KRA) on the transfer pricing (TP) methodology for related-party transactions.

This reform aims to enhance tax certainty, reduce TP disputes and align Kenya with international standards under the Organisation for Economic Co-operation and Development (OECD)/G20 Inclusive Framework on BEPS, particularly Action 14 on Dispute Prevention and Resolution.

Detailed discussion

Background

New ITA Section 18G, as amended by the Finance Act, 2025 (the Act), authorizes the Commissioner to enter into APAs with persons undertaking controlled transactions under Section 18(3) or 18A of the ITA.

Based on the Act, APAs shall be valid for a period not exceeding five consecutive years. Further, the Commissioner may invalidate the APA by issuing a written notice to the taxpayer if there is a misrepresentation of facts. The Cabinet Secretary is expected to publish detailed APA regulations within six months from the effective date.

Highlights

The APA regime is a proactive compliance tool that supports dispute prevention, a core pillar of BEPS Action 14. Key benefits of the APA regime that align with international best practices include:

  • Enhanced tax certainty for taxpayers on TP positions
  • Improved risk management for tax authorities through prior agreement
  • Reduced litigation and audit burden
  • Strengthened cooperation and trust between taxpayers and the KRA

In line with BEPS Action 14, the APA process serves as a complement to Mutual Agreement Procedures (MAP) and offers timely resolution of TP risks.

Implications

Kenya's APA regime represents a welcome step toward modernizing TP administration and building a climate of certainty and trust between KRA and taxpayers. Businesses should prepare to utilize this mechanism for proactive risk management and dispute mitigation. EY Kenya will provide updates as and when the regulations are published by the Cabinet Secretary in charge of Finance.

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Contact Information

For additional information concerning this Alert, please contact:

Ernst & Young (Kenya), Nairobi

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

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

Document ID: 2025-1730

 

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