Transfer pricing in Kenya and East Africa

Published on 24 October 2016

Recently, there has been increased attention on activities of multinationals in Kenya and the East Africa region with a particular focus on pricing arrangements of transactions between related parties. Transactions such as flow of goods, services and use or transfer of intangibles between related parties are to be carried out at an ”arm’s length” basis. Abuse of transfer pricing regulations is illegal and occurs when related entities manipulate the pricing of transactions between themselves resulting in transactions that are not carried out at arm’s length. Transfer pricing is an important area for revenue authorities as it is estimated that about 60% of international trade happens within multinational entities.
 
In Kenya, transfer pricing rules became effective from 1^st July 2006 and borrowed significantly from the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines. With Kenya increasingly being seen as the preferred destination to be the African base for many multinationals, transfer pricing has taken on increased significance over the past few years. The Global Financial Integrity (GFI) report estimates that Kenya loses about KShs 11.5 billion annually from transfer mispricing amongst multinationals.
 
The Kenya Revenue Authority (KRA) has aggressively sought to clamp down on illicit transfer pricing practices by conducting a raft of transfer pricing audits on multinationals in Kenya. These audits have resulted in recovery of billions of shillings in tax revenue, with the KRA Commissioner General, John Njiriani stating that KShs 25 billion was recovered in 2014 after audits of 40 multinational companies.
 
With transfer pricing being a pressing global concern, other countries in the East African region have also introduced transfer pricing legislation. Uganda and Tanzania both issued transfer pricing legislation in 2011 and 2014 respectively. Rwanda is expected to issue its own transfer pricing Guidelines before the end of the year. Introduction of transfer pricing legislation across the East African region comes after the GFI reported that illicit financial outflows in sub-Saharan Africa grew from $12.1 billion to $68.6 billion between 2003 and 2012.
  
This repatriation of profits by multinationals has been as a result of manipulation of loopholes of existing transfer pricing legislation. In Kenya, this has resulted in enactment of new legislation, the Tax Procedures Act, which has a specific provision for the offence of tax avoidance. The penalty under the new law is twice the amount of tax deemed to be avoided. The new legislation also gives the Commissioner wide reaching powers in determining what transactions constitute tax avoidance.
 
One of the weaknesses of Kenya’s current transfer pricing legislation is the absence of provisions for Advance Pricing Agreements (APA). An APA is an agreement, spanning a number of years, between a taxpayer and a revenue authority which specifies the transfer pricing method that will be applied to the taxpayer’s related company transactions.
 
APAs aid both the taxpayer and the revenue authority by presenting the opportunity to voluntarily resolve transfer pricing disputes in an amenable, cooperative manner. APAs also provide much needed certainty to a taxpayer with regard to its related party transactions and also reduce chances of potential tax penalties and double taxation. Tanzania’s transfer pricing regulations provide for scope for APAs between its revenue authority and taxpayers. In West Africa – Nigeria´s transfer pricing regulation provide for APAs.
 
KRA are in the process of drafting APA regulations and are taking into account input from various stakeholders before issuing the regulations. The APA regulations will come as a welcome relief for all parties involved as it should foster a more cooperative relationship between the taxman and the taxpayers and also reduce incidences of costly and often hostile transfer pricing audits.

In conclusion, as the government seeks to maximize revenue collection, transfer pricing will come more and more under the focus of the revenue authority. New legislation will serve to seal leakages in tax collection while simultaneously encourage taxpayers to be compliant and provide voluntary disclosure to the revenue authority.