On 4 September 2023, the Commissioner General of the Kenya Revenue Authority published the Draft Income Tax (Transfer Pricing) Rules, which will revoke the previous 2006 version of the rules.
The main aim of the new Transfer Pricing (TP) rules 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. And the main result for the taxpayer is the need for a major revamp of its TP Documentation protocol.
Some of the developments include:
- Expanding the scope of transactions subject to a TP review to include almost any intercompany flow one could think of, the usual suspects (goods, services etc) plus some more fun stuff, namely:
- Insurance and reinsurance transactions;
- Transactions involving derivatives;
- Cost-contribution arrangements;
- Business restructuring or reorganisation, irrespective of whether it has any bearing on the financial position of the entity involved (this is a biggy!);
- Financial transactions including guarantees, the purchase or sale of marketable securities, any type of advances and deferred payments or receivables (also a biggy).
- Enhancing the information in the local files to add a detailed description of amongst many others, the 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. This seems to be the norm globally on a TP front.
- Specific new guidance for commodity transactions, such as 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.
- Additional powers have also been clarified for the Commissioner to request lots of juicy additional information to support transfer prices, such as financial statements for all 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.
This clever revision of TP Rules in Kenya is expected to result in additional compliance requirements and thus as we anticipate the final rules, it would be wise for groups with entities in Kenya to proactively review their global operations and tax reporting to align with their economic value chain and our consultants at Regan van Rooy are here to help you with enhanced consistency and transparency in reporting, compliance, and documentation.