Transfer pricing in Kenya

In accordance with Section 18(3) of the Income Tax Act (CAP 470), Where a non-resident person carries on business with a related resident person or through its permanent establishment and the course of that business is so arranged such that it produces to the resident person or through its permanent establishment either no profits or less than the 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 or through its permanent establishment 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’.

A multi-national enterprise (MNE) is required to comply with The Income Tax (Transfer Pricing) Rules 2006, which offer guidelines on how to apply the arm’s length principle.

The Transfer Pricing rules empower the Commissioner of Domestic Taxes (KRA) to request for Transfer Pricing documentation to any Multinational enterprise operating in Kenya on transactions where Transfer Pricing is applicable.

Paragraph 4 of the Transfer pricing regulations grants the taxpayer the liberty of choice of the method to apply in valuation of the arms- length price of intercompany transactions.

The Income Tax Transfer Pricing Regulations 2006 recognizes five methods to apply in determination of the arm’s length price of transactions as outlined below:

    1. The comparable uncontrolled price (CUP) method
    2. The resale price method(RP)
    3. The Cost plus method
    4. The profit split method (PSM)
    5. The Transactional net margin
    6. Such other method as may be prescribed by the Commissioner from time to time, where in his opinion and in view of the nature of the transactions, the arm’s length price cannot be determined using any of the methods contained in these guidelines.

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