Transfer pricing refers to the rules and methods for pricing transactions between enterprises under common ownership or control. In Kenya, transfer pricing regulations ensure that transactions between related entities are conducted at arm’s length, meaning they should be priced as if the entities were unrelated. This is crucial for tax compliance and avoiding artificial profit shifting.

Regulatory Framework 

In Kenya, transfer pricing rules are governed primarily by the Income Tax Act (CAP 470) and enforced by the Kenya Revenue Authority (KRA). The key provisions are modeled the same or aligned with the OECD Transfer Pricing Guidelines, which emphasize the arm’s length principle. Businesses are required to document and justify their transfer pricing practices to ensure compliance with tax legislation in Kenya.

Compliance Requirements

The transfer pricing documentation consist of the master file, local file, country-by-country report and a notification to the KRA on whether the taxpayer is the ultimate parent or the identity of the ultimate parent or surrogate parent entity and the tax residence.

Transfer pricing documentation must be prepared and maintained annually, and the Masterfile and local file should be submitted to the KRA within six months after the end of the financial year. While the income tax return is submitted through the iTax platform, the KRA has provided an email address to which the transfer pricing documentation should be submitted through.

The notification is done through a prescribed form and is submitted before the end of the financial year by the taxpayer in Kenya. On the other hand, the country-by-country report is submitted by the ultimate parent or surrogate ultimate parent in their jurisdiction of tax residence. Should the KRA require the country-by-country report, it is obtained directly from the revenue authority of the jurisdiction of tax residence of the ultimate parent or surrogate ultimate parent under the globally agreed tax information sharing agreement.

Failure to comply with the transfer pricing documentation requirements attracts the general penalty for failure to keep documents related to tax information. This penalty if the higher of KES 100,000 or 10% of the tax payable under the tax law to which the document relate (corporate income tax in the case of transfer pricing). Other provisions relating to penalties such as the tax shortfall penalty and tax avoidance penalty may also apply.

Our Team of tax experts have hands on experience in the provision of transfer pricing advisory services. Kindly contact our tax service team to discuss in details on how we can assist you in enhancing your Company’s compliance status.