Kenya: A Fundamental Shift in the Transfer Pricing Regime in Kenya

Kenya’s 2022 Finance Act amended various provisions of the income tax law. One of the most notable and significant changes was the introduction of new TP provisions, the main one being a widening of the scope of controlled transactions to include cross-border and domestic transactions between unrelated parties. It also introduced CbCR requirements and the filing of local and master files by entities that are part of a multinational enterprise.

Preferential Tax Regimes (PTR)

Historically, the TP regime in Kenya focused on cross-border dealings between related parties, specifically, between resident entities or permanent establishments and related non-resident entities, following traditional Transfer Pricing principles.

In 2018, there was an amendment to the law, which required resident entities in Kenya transacting with related resident entities operating in preferential tax regimes (PTRs) to price their transactions based on the arm’s length principle. What was considered a PTR was any legal or administrative regime providing a reduced rate of tax. This was the first time that TP rules were applied to domestic transactions and the purpose was to avoid the abuse of PTRs.

The new provision imposes a new requirement for arm’s length pricing in transactions between resident entities and entities operating in PTRs, whether related or unrelated. For this purpose, the law has expanded the definition of PTRs to mean foreign jurisdictions which:

• do not tax income.
• tax income at a rate that is less than 20%.
• do not have a framework for exchange of information.
• do not allow access to banking information.
• lack transparency regarding corporate structure, ownership of legal entities, beneficial owners of income or capital, financial disclosure or regulatory supervision.
   

This law takes effect on 1 January 2023. The law will inevitably create complications and compliance is not likely to be straightforward. We expect that the government will issue regulations before the end of 2022 and address the questions arising around the bench­marking of transactions between unrelated entities.

Country-by-Country Requirements

Following the uptake of the OECD BEPS Action 13 documentation guidelines in numerous countries across Africa, Kenya has introduced an amendment that requires resident compa­nies in an MNE group with a turnover of KES 95 billion (EUR 750 million) to adopt the three-tiered approach to Transfer Pricing documentation. They are required to file a CbCR, a master file and a local file with the Kenyan Revenue Authority.

The Income Tax (Transfer Pricing) Rules in 2006 previously obligated taxpayers to prepare Transfer Pricing documentation and provide the TP reports to the KRA only upon request. The rules did not require regular filing.

The CbCR should be filed with the Kenyan Revenue Authority within 12 months from the end of the entity’s fiscal year end, while master and local files should be filed within 6 months of the company’s fiscal year end. The requirement to file master and local files extends to all entities that are part of an MNE. Failure to prepare and file the three TP documents will attract penalties.

These requirements will affect entities with accounting periods ending after 1 July 2022.

Read the WTS Global Transfer Pricing Newsletter here.