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Global Transfer Pricing Review

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TAX 2 | Global Transfer Pricing Review

Kenya

KPMG observation

Although the introduction of transfer pricing rules in Kenya is fairly recent, the Kenya Revenue Authority (KRA) has since started to conduct transfer pricing audits. The KRA currently chairs the Africa Tax Administrators Forum Transfer Pricing roundtable and assists other African tax authorities in performing transfer pricing audits. The KRA has so far issued assessments (deficiency notices) of up to USD50 million to taxpayers and it is expected that this focus on transfer pricing will continue since all ongoing tax audits must incorporate a report of findings on taxpayer transfer pricing activities. As a recent trend, KPMG in Kenya notes that there has been increased cooperation between Kenya and other competent authorities around the world for both information sharing and settling transfer pricing disputes through mutual agreement procedures (MAPs).

Transfer pricing study snapshot

The purpose of a transfer pricing study

Applicable

Legal requirements

Protection from penalties

Reduce risk of adjustment

Shifts burden of proof

Basic information What is the relationship threshold • where an individual who participates in the management, control or capital Tax authority name for transfer pricing rules to apply between parties? of the business of one, is associated Kenya Revenue Authority (KRA). by marriage, consanguinity or affinity An enterprise will be deemed to be to an individual who participates in Citation for transfer pricing rules related to another: the management, control or capital of Legal Notice no. 67 of 2006 and Section • if one of the enterprises participates the other. 18 (3) of the Income Tax Act (ITA). directly or indirectly in the The transfer pricing rules apply to cross- management, control or capital of Effective date of transfer pricing border transactions and to transactions the other enterprise or a third; person rules undertaken between a permanent participates directly or indirectly in establishment and its head office or 1 July 2006. the management, control or capital of other related branches. both enterprises; or

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What is the statute of limitations Does the tax authority require an A sustained adjustment results in unpaid on assessment of transfer pricing advisor/tax practitioner to have corporation tax. Any assessment raised adjustments? specific designation in order to is arrived at based on the impact of the prepare or submit a transfer pricing existing transfer pricing policy on taxable Seven years from the year to which the study? profits and consequently on corporation income relates. tax. Therefore, in arriving at the tax No. payable on the revised taxable profit, the Transfer pricing KRA applies the corporation tax rates of disclosure overview Transfer pricing methods 30 percent on residents and 37.5 percent Are disclosures related to transfer Does your country follow the on non-residents. pricing required to be submitted to transfer pricing methods outlined in Under the ITA, penalties accrue on the revenue authority on an annual Chapter II of the OECD Guidelines? unpaid taxes at the rate of 20 percent. basis (e.g. with the tax return)? If exceptions apply, please describe. Additionally, the principal tax outstanding attracts interest at two percent per Yes. Although the ITA does not require Yes. However, the Commissioner may month over the period it remains unpaid. taxpayers to include copies of transfer prescribe other methods where in his However, because of the in duplum rule, pricing documentation when submitting opinion, the Chapter II methods (which the interest is capped to a maximum of the annual tax return, the KRA has are similar to those in the transfer pricing the principal tax assessed on adjustment. introduced an online tax return platform rules) do not yield an arm’s length price. where taxpayers should disclose details To what extent are transfer pricing of the related party transactions. Transfer pricing audit and penalties enforced? What types of transfer pricing penalties Transfer pricing penalties are enforceable information must be disclosed? When the tax authority requests to the full extent of the Income Tax Act. The Commissioner may recover the The disclosure required while filing a taxpayer’s transfer pricing taxes due from the person assessed the tax return is the related party, the documentation, are there timing e.g. through attaching bank balances and transaction value and description of the requirements for a taxpayer to registering liens over fixed assets. transaction. submit its documentation? And if so, how many days? What are the consequences of What defenses are available with failure to submit disclosures? Yes, 30 days. respect to penalties? Documentation forms the basis for The consequences of not providing the When the tax authority requests penalty protection. A taxpayer is related party disclosures details entails a taxpayer’s transfer pricing expected to capture all justification filing an erroneous return and it is a documentation, are there timing in the transfer pricing documentation trigger for an audit. requirements for a taxpayer to submit its documentation? Please for demonstrating the arm’s length explain. nature of prices charged on intra-group Transfer pricing study transactions. The KRA may require a taxpayer to overview furnish documentation within a specified What trends are being observed Can documentation be filed in time, usually no less than 30 days. currently? a language other than the local language? If yes, which ones? If an adjustment is proposed by The tax authority is vigilant on training the tax authority, what dispute its staff on transfer pricing to ensure It should be in English. resolution options are available? enforcement of the transfer pricing rules. For example, transfer pricing audit When a transfer pricing study is An aggrieved taxpayer has recourse teams are specializing based on the prepared, should its content follow through an appeal procedure system different aspects of a documentation Chapter V of the Organisation established under the ITA. The order of report. Thus the KRA audit team will have for Economic Co-operation and appeal for an adjustment proposed by the an expert on functional analysis, asset Development (OECD) Guidelines? tax authorities is as follows: analysis, risk analysis, economic analysis Yes, for all transactions. Transfer pricing • first level: Local Committee etc. Additionally, the tax authority has documentation should be reviewed • second level: High Court of Kenya subscribed to Orbis as a benchmarking annually to ensure that it remains tool. This tool has over 65 million • third level: Court of Appeal; and relevant in view of changes in the companies in its database and is more business environment. According to • fourth level: Supreme Court of Kenya. advanced than the benchmarking tools the transfer pricing rules (paragraph If an adjustment is sustained, can currently in use by most tax advisors. 10), the Commissioner can request penalties be assessed? If so, what documentation at any time, and thus The KRA is conducting more audits on rates are applied and under what documentation must be readily available. multinational corporations and levying tax conditions? penalties on transfer pricing adjustments on sale of goods and services, financial transactions, shared services, etc.

Special considerations In Kenya, all domestic taxes are Tax treaty/double tax administered under the Commissioner Are secret comparables used by tax of Domestic Taxes of the KRA, even resolution authorities? though Customs is headed by a What is the extent of the double tax No secret comparables are used by the Commissioner. These domestic taxes treaty network? revenue authorities. include: customs and excise duties, Minimal. VAT, and, corporation tax among others. Is there a preference, or If extensive, is the competent requirement, by the tax authorities As such, the level of interaction among these tax administration departments is authority effective in obtaining for local comparables in a double tax relief? benchmarking set? relatively high. Sometimes. Yes. KRA has expressed a preference Are there limitations on for local comparables, especially where deductibility of management fees When may a taxpayer submit an comparable uncontrolled prices are beyond the arm’s length principle? adjustment to competent authority? readily available and have intimated Yes, some. Management’s fees paid In the event that the tax adjustment the possibility of making country risk by a branch to the head office are will affect both countries, it may involve adjustments where comparables from not deductible expenses in arriving transfer of profits and therefore impact different geographical locations such as at the taxable profits. They are also on the tax paid with respect to the Europe are used. not subject to withholding tax. respective years. Do tax authorities have Management fees beyond the arm’s length price, will not be allowable May a taxpayer go to competent requirements or preferences authority before paying tax? regarding databases for deductions when arriving at the taxable comparables? income for corporation tax. Yes, we have previous experience with competent authority in UK (HMRC). No. The KRA does not have requirements Are management fees subject to or preferences regarding databases withholding? to be used for comparables. However Yes. Advance pricing the larger the database to be used, agreements Are there limitations on the the more optimal the transfer pricing deductibility of royalties beyond the What APA options are available, if benchmarking results. As stated earlier, arm’s length principle? any? KRA is at an advantage as it uses a more comprehensive database (Orbis). This Yes. Where the royalty payments exceed None. may result in differing benchmarking the arm’s length price, the excess Is there a filing fee for APAs? results as compared to other databases, royalty payments will not be allowable Not applicable. consequently resulting in tax exposures deductions when arriving at the taxable to the particular companies involved. income for corporation tax. Does the tax authority publish APA data either in the form of an annual Does the tax authority generally Are royalties subject to report or through the disclosure of focus on the interquartile range in a withholding? TNMM analysis? data in public forums? Yes. Not applicable. Yes, sometimes. Are taxpayers allowed to file tax Are there any difficulties or Does the tax authority have other return numbers that differ from limitations on the availability or preferences in benchmarking? If so, book numbers? please describe. effectiveness of APAs? Yes, but it should be carefully executed. Not applicable. Preference is given to the CUP method if It has to be pre-agreed and clearly show it is available. a change of transfer prices (not transfer of profit). The KRA advocates for the use of the median and are not comfortable with Other unique attributes? KPMG in Kenya accepting that the arm’s length price lies Before the issuance of the specific within the interquartile range. Peter Kinuthia transfer pricing legislation, the KRA had Tel: +254 20 2806 000 What level of interaction do tax engaged a Kenyan multinational in the Email: [email protected] authorities have with customs High Court with regard to transfer pricing authorities? issues. The KRA has also proposed to As email addresses and phone numbers change amend the annual tax return to include a frequently, please email us at transferpricing@ kpmg.com if you are unable to contact us via the section on transfer pricing disclosures. information noted above.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2015 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Designed by Evalueserve. Publication name: Global Transfer Pricing Review Publication number: 132762-G Publication date: October 2015