Summary Article: Income Tax (Transfer Pricing) Rules 2023

Sep 29, 2023 | Case Brief, Finance, Investments, Law, Our Highlights

The Government of Kenya, through the Cabinet Secretary for National Treasury and Economic Planning, has proposed new Transfer Pricing Rules [Income Tax (Transfer Pricing) Rules, 2023] (TPR, 2023), that, if it comes into effect, will replace the Income Tax (Transfer Pricing) Rules, 2006 (TPR, 2006). Considering the rapid transactional development both at the municipal and cross-border levels, it has proven to be necessary for the need to consider revising the current regulatory framework in place.

The proposed rules focus on enhancing control of the transactions between related entities and the type of information that will be required by the Kenya Revenue Authority (“KRA” or “Commissioner” or “Regulator”). There are at least five pricing models that a person may opt-in for purposes of being compliant with the proposed TPR 2023. These models include comparable uncontrolled price method, resale price method, cost plus method, profit split method, transaction net margin method, and any other that the Commissioner based on the possible challenges of the five methods not projecting the intended arm’s length pricing model. It is essential to mention that the Commissioner may provide further guidelines on the applicable methods to enhance arm’s length transactions between related entities or similar transactions.

These rules will apply to tangible and intangible property, services, financial transactions (including insurance and re-insurance), corporate organization, derivatives, cost contribution, and any transaction that has an impact on the profit or loss of the involved enterprise. Therefore, the scope of TPR 2023 is broader and will require persons to re-evaluate their respective transactional structures to reduce the possibility of being exposed to various penalties for lack of compliance with TPR 2023.

TPR 2023 has direct implications for the ascertainment of gains or profits of business in relation to certain non-resident persons in a preferential tax regime, notification to the commissioner by multinationals, and country-by-country report, master file, and local file. Furthermore, this extends to the applicable offences under the Income Tax Act (ITA) and definitions as per s 18F of the ITA, and Tax Procedures Act (TPA). The Commissioner has been clothed with information request authority that may provide a detailed internal overview of any corporate entity to these laws apply; therefore, there is a need for the to be affected entities to consider conducting an audit to enhance compliance. It is encouraged that for the avoidance of surprise and considering the current tax laws under the Finance Act 2023, were majorly adopted as is under the Finance Bill 2023, companies should consider preventive legal measures by starting to put compliance measures as early as now for easy transitioning from TPR 2006 to TPR 2023.