Transfer Pricing Policy (Kenya)

A Transfer Pricing Policy in Kenya transfers the assignor's rights or interests to the assignee on the terms it specifies.

Section 18 of the Income Tax Act Cap. 470 empowers the Commissioner of Domestic Taxes to adjust the income of a person where a transaction between related parties has been entered into on terms that differ from those that would be agreed between independent parties dealing at arm's length. The arm's length standard — the bedrock principle of international transfer pricing — requires that prices for intra-group transactions match those that would have been agreed between unrelated parties in comparable circumstances under Section 18(3) of the Income Tax Act Cap. 470.

The Income Tax (Transfer Pricing) Rules 2006 elaborate on Section 18 of the Income Tax Act Cap. 470 and adopt the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations as the interpretive framework. The KRA formally adopted the OECD Guidelines, most recently updated in 2022, as the primary reference point for determining arm's length prices. Rule 7 of the Transfer Pricing Rules 2006 requires taxpayers to maintain contemporaneous documentation — a Transfer Pricing Policy and supporting analysis — demonstrating that their intra-group transactions comply with the arm's length principle.

The Finance Act 2022 introduced significant amendments to Kenya's transfer pricing regime, including new Country-by-Country Reporting (CbCR) obligations for multinational groups with consolidated group revenues exceeding KES 95 billion (approximately USD 750 million). CbCR is filed annually with the KRA under the Income Tax (Country-by-Country Reporting) Rules 2022. A Master File and Local File approach, aligned with the OECD Base Erosion and Profit Shifting (BEPS) Action 13 recommendations, is now expected by the KRA for large taxpayers under audit.

The Kenya Revenue Authority's Transfer Pricing Unit within the Large Taxpayer Office (LTO) and the Medium Taxpayer Office (MTO) actively scrutinises intra-group transactions including management fee arrangements, intercompany loans, royalties for brand or technology licences, and distribution arrangements. The KRA's Tax Procedures Act No. 29 of 2015 governs audit procedures, objections, and appeals before the Tax Appeals Tribunal (TAT) and the High Court of Kenya.

Penalties for transfer pricing non-compliance under the Tax Procedures Act No. 29 of 2015 include: a surcharge of 20% of the additional tax assessed on transfer pricing adjustments; interest at the Central Bank Rate plus 2% per annum on underpaid tax; and potential criminal liability for deliberate understatement under Section 95 of the Tax Procedures Act. A Transfer Pricing Policy, consistently applied and supported by contemporaneous documentation, is the primary defence against KRA transfer pricing adjustments.

The legal framework governing the Transfer Pricing Policy (Kenya) in Kenya draws on several key statutes and regulatory bodies. Under the Companies Act No. 17 of 2015, the Registrar of Companies at the Office of the Attorney General maintains the register of Kenyan companies. Section 3 of the Law of Contract Act (Cap. 23) governs contractual obligations. The Competition Authority of Kenya (CAK) enforces the Competition Act No. 12 of 2010. The Kenya Revenue Authority (KRA) administers corporate tax under the Income Tax Act (Cap. 470). The High Court of Kenya has unlimited original jurisdiction under Article 165 of the Constitution of Kenya 2010. Parties executing a Transfer Pricing Policy (Kenya) in Kenya should confirm the document reflects current law, including any amendments enacted since the original drafting date. The Income Tax Act Cap. 470 s.18 sets the foundational requirements.

A Transfer Pricing Policy Kenya is required for every Kenyan taxpayer — whether a subsidiary, branch, or associated company — that enters into transactions with related parties, whether domestic or cross-border.

A Transfer Pricing Policy is needed when a Kenyan subsidiary of a foreign multinational group pays management fees, technical service fees, or IT support charges to its parent company or a regional service hub. The KRA's Transfer Pricing Unit scrutinises management fee arrangements closely, and a Transfer Pricing Policy documenting the arm's length basis for the fee — benchmarked against comparable independent service agreements — is essential to defending the deductibility of those fees under Section 15 of the Income Tax Act Cap. 470.

A Transfer Pricing Policy is required when a Kenyan company borrows from a related party — a parent, sibling, or holding company — at a stated interest rate. Intercompany lending arrangements are subject to the arm's length interest rate standard under the Income Tax (Transfer Pricing) Rules 2006, and the KRA will compare the intercompany rate against rates available to the Kenyan borrower from independent commercial banks. The policy must document the financial comparables used and justify the rate applied.

A Transfer Pricing Policy is needed when a Kenyan entity uses intellectual property — trademarks, patents, know-how, or software licences — owned by a foreign group company and pays royalties for that use. Royalty rates for intangibles are one of the most contentious areas of transfer pricing globally. The KRA expects the royalty rate to be benchmarked against comparable licences between independent parties, and the Transfer Pricing Policy must set out the valuation methodology used.

A Transfer Pricing Policy is required when a Kenyan company is part of a regional group and buys or sells goods — manufactured products, raw materials, or commodities — to related entities in other African countries. For commodity transactions, the Comparable Uncontrolled Price (CUP) method, using publicly available market prices from recognised commodity exchanges, is often the most appropriate method under the OECD Guidelines as applied by the KRA.

A Transfer Pricing Policy is needed when a Kenyan company is subject to a KRA transfer pricing audit. The Tax Procedures Act No. 29 of 2015 requires taxpayers to provide the KRA with transfer pricing documentation within 30 days of a written request. A thorough Transfer Pricing Policy — drafted and approved before the audit — is the primary component of the taxpayer's contemporaneous documentation package.

A Kenya Transfer Pricing Policy under the Income Tax Act Cap. 470 s.18 and the Income Tax (Transfer Pricing) Rules 2006 must contain the following essential elements to satisfy KRA contemporaneous documentation requirements and the OECD Guidelines.

Group Overview and Organisational Structure: A description of the multinational group's global structure, the position of the Kenyan entity within the group, and an organisational chart identifying all related parties with whom the Kenyan entity transacts. 'Related party' is defined under Rule 2 of the Transfer Pricing Rules 2006 as persons connected through ownership of 25% or more of shares or voting rights, or persons related by management, control, or family.

Description of Controlled Transactions: A thorough catalogue of all intra-group transactions including: (a) sale and purchase of goods; (b) provision and receipt of services (including management, IT, HR, finance, and technical services); (c) loans and financial guarantees; (d) royalties and licence fees for intellectual property; (e) cost-sharing and cost-contribution arrangements. Each transaction category should specify the parties, the nature of the transaction, annual volumes, and the currency.

Functional Analysis: An analysis of the functions performed, assets employed, and risks assumed (FAR analysis) by the Kenyan entity and its related-party counterparts for each controlled transaction category. The FAR analysis is fundamental to selecting the appropriate transfer pricing method under the OECD Guidelines.

Transfer Pricing Methods: The primary and secondary transfer pricing methods selected for each transaction category, with justification. The Income Tax (Transfer Pricing) Rules 2006 recognise the following methods in order of preference: Comparable Uncontrolled Price (CUP), Resale Price Method (RPM), Cost Plus Method (CPM), Transactional Net Margin Method (TNMM), and Profit Split Method. The TNMM using a net profit indicator (NPI) such as operating profit margin is widely used in Kenya for distribution, service, and manufacturing entities.

Benchmarking Study Reference: A reference to the benchmarking analysis — a search of independent comparable transactions or companies using databases such as Bureau van Dijk's Orbis Africa — establishing the arm's length range (the interquartile range) applicable to the Kenyan entity's transactions. The policy should specify the search methodology, the database used, and the financial year of the comparables.

Arm's Length Ranges and Pricing Outcomes: The arm's length price range or margin range determined by the benchmarking analysis, and a statement of where the Kenyan entity's actual transaction prices or margins fall within or outside the range. Where the actual result falls outside the arm's length range, the policy must explain any adjustments made.

Intercompany Agreements: A list of the intercompany agreements governing each transaction category — service level agreements, loan agreements, licence agreements, cost-sharing agreements — with their effective dates and counterparties. The Transfer Pricing Policy should be consistent with and cross-reference these agreements.

Review and Update Cycle: A commitment to review the Transfer Pricing Policy annually, and to update the benchmarking study at least every three years or whenever a material change in the group's business or the Kenyan entity's transactions occurs. The KRA expects contemporaneous documentation to be prepared before or at the time of filing the annual income tax return under Section 52B of the Income Tax Act Cap. 470.

Approval and Governance: The approval authority for the Transfer Pricing Policy — the Board of Directors or Tax Committee — and the names and titles of the persons responsible for transfer pricing compliance in Kenya. The forms-legal.com Kenya Transfer Pricing Policy template provides a structured framework aligned with the KRA's documentation expectations and the OECD BEPS Action 13 standards.