Kenya: The Proposed Overhaul of Kenyan Income Tax Law – consider Transfer Pricing

published on 3 Mai 2018
 

Kenya is set to overhaul its current Income Tax regime legislation which has been in place from January 1974. The Government recently announced plans to come up with a new Income Tax Bill (hopefully this June 2018 budget) that will incorporate changes and developments in technology and business.
 

The current Income Tax Act has been considered outdated and subject to numerous amendments over the years.
 

 
One of the areas that we expect changes should be the regulations that Govern cross border transactions between related parties. The Kenyan economy has grown over the years and the Kenyan Capital Nairobi hosts a number of multinationals that use Nairobi as a hub for the East African region. As a regional hub – many companies in Kenya have numerous cross border transactions that have Transfer Pricing implications.
 

The Kenyan transfer pricing legislation was incorporated into the Income Tax Act (ITA) in 2006. The legislation confers the Commissioner of Domestic Taxes powers to adjust the profits of a resident person who carries on business in Kenya with a related non-resident person where the business is so arranged as to produce to the resident person either no profits or less than ordinary profits. Section 18(3) of the ITA (which is the relevant section) – reproduced below:
 

“Where a non-resident person carries on business with a related resident person and the course of that business is so arranged that it produces to the resident person either no profits or less than ordinary profits which might be expected to accrue from that business if there had been no such relationship, then the gains or profits of that resident person from that business shall be deemed to be the amount that might have been expected to accrue if the course of that business had been conducted by independent persons dealing at arm's length”
 

The rules under the ITA came into effect on 1^st of July 2006. Their main purposes is to provide guidelines to be applied by related enterprises, in determining the arm's length prices of goods and services in transactions involving them and to provide administrative regulations, including the types of records and documentation to be submitted to the Commissioner by a person involved in transfer pricing arrangements. The Law also confers the Kenya Revenue Authority with powers to issue further guidelines on transfer pricing where they deem it necessary. 
 

The rules under the ITA mirror the principles set out by the Organisation for Economic Co-operation and Development (OECD). OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines) are the most widely used and accepted set of transfer pricing rules.
  

The generally agreed upon practices of the member countries of the OECD for determining transfer prices are addressed in the OECD Guidelines. The Kenyan transfer pricing rules are be interpreted in tandem with the OECD Guidelines although Kenya is not a member of the OECD.

OECD uses mainly used Amadeus database to compare financial information for companies across Europe. There is currently no database for African companies that have been developed and for this reason Kenya Revenue Authority (KRA) accepts global databases which include Amadeus and ONESOURCE Worldwide Private Company Database to benchmark Kenyan companies. Critics have argued that the databases available are not comparable to Kenya companies since the databases provide information of companies that operate in a totally different geographical environment and under different circumstances therefore rendering the information incomparable.
 

In order to update and simplify the current Transfer Pricing practice in Kenya, the Income Tax Bill should consider a number of proposals.
 

The income Tax Bill should amend the Transfer Pricing rules to consider adopting safe harbour transfer pricing rules into law for specific categories of transactions such as non-core services. Safe harbour rules are a set of simple rules which allow taxpayer especially small and medium enterprises (SMEs) who cannot afford the cost of transfer pricing, some certainty about how its transfer prices will be perceived by the tax authorities.
 

Generally, safe harbour rules set a range of prices that are considered to be arm's length such that when a taxpayer applies a price that is within that range, the tax authorities are bound to automatically accept that the transfer price is an arm's length price. For example Australia allows a mark-up of 7.5% on intercompany services while New Zealand allows a recharge of cost plus 7.5% for intra-group core services.
 

If adopted into law, the rules will reduce the administrative burdens on SMEs and shall offer predictability to both taxpayers and the revenue authorities. Additionally, they will also greatly reduce number of litigation by the taxpayers and KRA.
 

In addition a certain threshold for Transfer Pricing documentation should be considered. Not all Kenyan Companies that have related party transactions should be required to prepare and document the Transfer pricing documentation.
 

Some of these transactions may be minimal or have no material impact on taxes and hence the preparation of the documentation provides additional business burden to the taxpayer.
 

Finally the Income Tax Bill should consider introducing practice notes to guide on a number of benchmarks from a Transfer Pricing perspective. Practice notes will reduce uncertainty and disputes in Kenyan Transfer pricing landscape and practice.

With these proposals, the Kenya Transfer Pricing rules will get closer to globally accepted standards.