What sparked the dispute
Beta Healthcare International Ltd (“Beta Healthcare”), a Kenyan pharmaceutical manufacturer and wholly owned subsidiary of Aspen Pharmacare Holdings (South Africa), was issued a transfer pricing adjustment by the Kenya Revenue Authority (KRA) amounting to Ksh 480 million. The dispute centred on the pricing of goods sold to related parties in Uganda, Tanzania, Ghana, and Nigeria.
Core issue in dispute
Methodology Conflict:
KRA applied the Comparable Uncontrolled Price (CUP) method, comparing Beta Healthcare’s sales to third parties with those to related parties. Beta Healthcare argued that the CUP method was inappropriate due to significant differences in transaction terms, volumes, and market conditions, and instead applied the Transactional Net Margin Method (TNMM) using earnings before interest and taxes (“EBIT”) as the profit level indicator. KRA argued that Beta Healthcare sold identical pharmaceutical products to related entities at significantly lower prices than to independent distributors, and that internal comparables existed.
KRA argued that Beta Healthcare failed to demonstrate that the conditions of sale to related parties materially differed from those to independent customers. Crucially, Beta Healthcare did not submit a Transfer Pricing Local File at the time of audit or objection, which would have served as a first line of defence by documenting the functional analysis, economic circumstances, and rationale for the selected method. This omission significantly weakened Beta Healthcare’s position and contributed to the Tribunal’s finding that the burden of proof had not been met.
Comparability Adjustments Ignored:
While Beta Healthcare proposed a series of comparability adjustments ranging from transport and insurance costs to volume discounts and market price differentials, the Tribunal found that these adjustments lacked sufficient evidentiary backing. Although the adjustments were conceptually aligned with OECD guidelines and intended to account for material differences between controlled and uncontrolled transactions, Beta Healthcare did not provide contemporaneous documentation or empirical data to substantiate the magnitude or reliability of these adjustments (e.g., segmented data, comparability analyses, tested party details, OECD comparability factors, and third-party business development costs). As a result, the Tribunal concluded that the proposed adjustments could not be relied upon to materially affect the outcome of the CUP analysis.
KRA Key Argument
KRA argued that Beta Healthcare had underpriced its sales to related parties, thereby reducing its taxable income in Kenya. Central to KRA’s position was the assertion that the products and transactions in question were sufficiently similar to justify the use of the CUP method. KRA rejected Beta Healthcare’s proposed comparability adjustments, stating that any differences were either immaterial or already captured in Beta Healthcare’s financials. It further contended that Beta Healthcare performed the same functions and assumed similar risks across both related and unrelated party transactions, and that all sales occurred within Kenya under uniform economic conditions rendering geographic adjustments unnecessary. KRA also alleged that Beta Healthcare provided free goods to related parties, effectively lowering the transaction price, and maintained that credit terms were consistent across customer types, negating the need for credit risk adjustments. Critically, Beta Healthcare’s failure to produce a Transfer Pricing Local File meant it lacked a foundational defence to substantiate its pricing policies or demonstrate segment-level profitability, particularly in relation to related party distribution.
Key Takeaways!
- Substance over form: Courts and tax authorities are increasingly focused on actual conduct, not just contractual terms.
- Robust documentation: Functional analysis, comparability adjustments, and economic context must be clearly evidenced. No Local File, no defence.
- Method selection matters: CUP cannot just be ignored – if third-party arrangements exist and detailed evidence is required to support comparability adjustments.
Our team is equipped to help your organisation interpret and apply these concepts effectively. Get in touch for tailored guidance and stay ahead in the dynamic world of international taxation.
Stay informed and compliant, connect with us for expert insights and customised solutions that align with your business needs.
English 
French