Executive summary

The Cabinet Secretary for the National Treasury and Economic Planning, on 3 November 2025, issued the Draft Income Tax (Advance Pricing Agreement) Regulations, 2025 (Draft APA Regulations) pursuant to Section 18G of the Income Tax Act. The framework introduces Kenya's first formal Advance Pricing Agreement (APA) regime, effective from 1 January 2026, providing taxpayers with an avenue for certainty on transfer pricing positions and risk mitigation. Public comments are invited until 2 December 2025.

The guidelines are expected to operationalize the APA framework, which was introduced by the Finance Act, 2025 with an effective date of 1 January 2026. The Kenyan APA framework covers a five-year period.

The Draft APA Regulations outline a structured process for taxpayers to enter into advance agreements with the Kenya Revenue Authority (KRA) on transfer pricing methodologies. The Regulations cover the full APA lifecycle from prefiling, application, negotiation, execution, renewal, revision and cancellation. They apply to related-party transactions governed by Sections 18(3) and 18A of the Income Tax Act.

Detailed discussion

The APA draft Regulations made under the authority of the Cabinet Secretary for the National Treasury provide the essential administrative framework for the APA regime.

Defining an APA

An APA is an arrangement between a taxpayer and the Commissioner (and, where applicable, the competent authorities of treaty partners) that determines, in advance, the transfer pricing methodology for specified related-party transactions over a fixed period. APAs aim to provide predictability, prevent double taxation and reduce disputes.

Types of APAs include:

• Unilateral APA (UAPA) — between the taxpayer and the Commissioner only
• Bilateral APA (BAPA) — between the taxpayer, the Commissioner and one treaty partner
• Multilateral APA (MAPA) — involving multiple treaty partners

Scope and application

The Regulations apply to related-party transactions under Income Tax Act Sections 18(3) and 18A. Eligible taxpayers may apply for APAs covering transactions with nonresidents (UAPA), resident entities in preferential regimes or transactions covered by tax treaties (BAPA/MAPA).

Key steps in the proposed Kenya APA process involve:

• Prefiling consultation: The taxpayer requests prefiling with the Commissioner at least 12 months prior to the proposed APA period. The Commissioner is then required to respond with a meeting invite within 30 days and communicate the results of such screening within another 30 days.
• Formal application: The taxpayer submits a formal application within 30 days of the Commissioner's approval to proceed by paying a nonrefundable fee of 5,000,000 Kenyan shillings (KES5m), with an indicative timeline of 30 days for completion of this phase.
• Negotiation: This involves engagement with the Commissioner and treaty partners (where applicable) to agree on the APA terms. The draft Regulations do not provide an indicative timeline for this phase of the APA process.
• Execution: Upon alignment and written acceptance of the agreed terms, the APA is formally executed.
• Annual compliance: The taxpayer is expected to file an annual compliance report within six months after the close of every period covered by the APA.
• Renewal: The taxpayer may request that the APA be renewed at least six months before expiry of the current APA and must remit a renewal fee of KES2.5m.

Key features of the draft Regulations

The draft Regulations propose the following features:

• A rollback mechanism allowing a concluded APA to be retrospectively applied to a prior period with a similar fact pattern if no tax audit or investigation has been initiated
• Indicative timelines for some of the critical phases of the APA process, such as prefiling and formal application steps to promote procedural clarity
• Renewal and revision provisions supporting continuity and responsiveness to changes in facts or law
• Involvement of independent experts, particularly for complex or industry-specific intercompany transactions (although costs are to be borne by the taxpayer even when engaged by the Commissioner), thereby enhancing the APAs reliability and quality
• Allowance for compensating adjustments to align tax positions with agreed APA outcomes for previously filed returns, provided those periods have not undergone tax audits
• Opt-out provisions allows for voluntary withdrawal at any point of the APA process prior to finalization
• Binding legal effect of executed APAs on both parties, subject to confidentiality obligations

Although the introduction of the APA regime is a significant milestone in aligning Kenya's transfer pricing framework with global best practice, there are certain aspects of the draft Regulations that could be enhanced to improve effectiveness, including:

• The high application (KES5m) and renewal (KES2.5m) fees may limit accessibility for smaller taxpayers. These fees are also nonrefundable.
• The prefiling documentation requirements could be excessive for an initial engagement stage.
• The absence of statutory timelines for the KRA's review could lead to process delays and uncertainty.
• A structural separation between APA and audit teams within the KRA would strengthen objectivity and taxpayer confidence.
• Alignment between APA outcomes and customs valuation rules under the East African Community Customs Management Act would enhance coherence across tax regimes.

Implications for taxpayers

Kenya's proposed APA framework represents a progressive step toward fostering predictability, compliance and investment confidence, but the Regulations could also better parallel global best practices to enhance their effectiveness in resolving transfer pricing disputes.

Once finalized, the Regulations will equip taxpayers with a practical avenue to proactively manage transfer pricing risk and reduce disputes. However, refinements regarding fees, process timelines and administrative separation will be key to ensuring effectiveness and uptake.