How to draft a transfer pricing policy
Transfer Pricing in Kenya
It was after the judgment made in 2005 in the case of Unilever Kenya Limited versus the Commissioner of Domestic Taxes that Kenya provided the income tax (Transfer pricing Rules) 2006, which borrows heavily from the Organization for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines.
What Is Transfer Pricing?
Transfer pricing is setting prices for various transactions taking place between associated organizations. This is a common practice with enhancement in international trading activities and globalization. However, manipulations in transfer pricing enhance capital flight risk and profit shifting by various international entities.
As a result, Kenya has put in place various measures to protect the tax base from various risks arising from transfer pricing as a result of international transactions between associated entities. This has been attained through enhancement and enactment of tax administration and legislation.
It is illegal to abuse transfer pricing and this normally happens when associated entities manipulate pricing of transactions between each other, and thus, there arises transactions not conducted at arm’s length. Transfer pricing should be conducted at arm’s length. Transfer pricing is a critical area for revenue collection and allocation authorities as its is makes approximately 60% of international trade.
Transfer Pricing Developments in Kenya
Transfer pricing rules take effect in Kenya from 1st July 2006 and was significantly borrowed from the Organization for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines. The following are some of the areas where the Income tax (Transfer pricing) Rules apply to:
- Transaction between a permanent institution and its branches or head office, where the permanent institution shall be accounted for as a separate and distinct enterprise from the branches and the head office.
- Transactions between associated entities within an international company, in this case, one entity is located in Kenya, and is subjected to tax in Kenya, and the other entity is located outside Kenya.
The set rules provide a foundation for the determination of transfer pricing. Moreover, they issue the Commission with an entitlement to make adjustments on transaction prices where they are of the view that the associates entities did not conduct their transactions at arm’s length.
Some transactions subject to transfer pricing include:
- The purchase, sale, use, or transfer of intangible assets
- The sale or purchase of services and goods
- The borrowing or lending of money
- The purchase, lease, or sale of tangible assets
- Provision of services
- Any transaction that could affect the loss or profit of the entities involved
Preparation Of Transfer Pricing Documentation
All documentation must be prepared in or is required to be translated into English language. Kenya recognizes the Organization for Economic Co-operation and Development (OECD) model of documenting transfer pricing based on the approach of Master File and Local File (BEPS Action 13).
Master and Local File
Documentations help the tax authorities in TP questionnaires filing and proving that the arm’s length application is principle. The master and local file provide essential information to tax authorities on assessment of the various functions conducted by MNE’s and their related enterprises and give comparability information of similar transactions globally.
The finance Act, 2022, introduced precise information requirements for every prescribed file in section 18D of income tax, Cap 470. Moreover, the Commissioner is expected to provide guidance on the specific way of filing for the master file and local file.
The Kenya Revenue Authority (KRA) may currently request taxpayers to submit the following documentations for conducting transfer pricing:
- Background data as may be necessary regarding the transactions
- The strategies, assumptions, and applied policies in selecting the suitable method
- The structure of the global organization of the entity
- The various details of the transactions under consideration
- The books of accounts
- The application of the method, including all the calculations made and adjustments made under the considered facts
- The selection of the method used in transfer pricing and the reasons for selecting the method.
What Is CbC Report?
A country by country (CbC) report is a 3-tier yearly report transfer pricing filing obligation, as a minimum standard reporting commendation of the BEPS Action 13. The standard on CbC reporting has evidently enhanced sharing of information on group operations globally and increased transparency between the various tax authorities in various jurisdictions. The standard needs the ultimate parent entities to disclose financial information that relates to all their operations in every jurisdiction where the group has a taxable existence.
Advanced Pricing Agreements (APAs), Dispute Avoidance and Resolution
Kenya has a Mutual Agreement Procedure (MAP), for resident taxpayers if they establish that an action of Kenya Revenue Authority or one of the tax treaty partners of Kenya, or both, will result in taxation which is not in accordance with a tax treaty in place between the two jurisdictions.
Nevertheless, the Mutual Agreement Procedure (MAP) must be initiated with the Kenyan Competent Authority and filed within 3 years from the date of notification of the act.
There is no Advanced Pricing Agreement (APA), however, the law provide room for taxpayers to seek private ruling regarding transactions that require clarification.
For more information and comprehensive guide on transfer pricing in Kenya, please contact CPA Mutitu Dennis Here at www.dennykinsassociates.com, we have a team of dedicated experts who work round the clock to ensure that you have the best professional experience, ensure compliance, and have an amazing journey while running your business and building your professional experience.