Markets & Finance

Tax experts fault KRA standard transfer pricing

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KRA commissioner-general John Njiraini. PHOTO | SALATON NJAU

A proposal by the Kenya Revenue Authority (KRA) to tighten transfer pricing guidelines has met resistance from auditors and tax advisors.

The taxman has proposed to use a single market price as the reference point in determining whether a multinational has violated the Income Tax Act.

But tax experts are questioning whether there can be a single price in the market or KRA should look at a range of prices in calculating transfer pricing—the sale of goods between related parties.

KRA prefers a median (middle) market price, but tax advisors say many prices should apply as is the practice in the Organisation of Economic Cooperation and Development (OECD)— a club of advanced countries in Europe and North America.

The tax experts argue that the OECD guidelines specify a range of prices in line with the reality in the market rather than a single figure.

“We are opposed to most of the proposals by the KRA on transfer pricing. We have already given our feedback to the proposals and we are expecting a draft on new guidelines to be released for stakeholder feedback,” said Caxton Kinuthia, a tax director at audit and tax advisory firm KPMG Kenya.

The revenue body has come up with the proposals after auditing a number of multinational firms with transfer pricing issues.

KRA commissioner-general John Njiraini recently revealed he had audited just over 30 multinational companies and had recovered Sh15 billion in extra taxes.

READ: Tax evasion sting recovers Sh25bn from multinationals

This suggests each multinational was able to evade paying an average of about Sh500 million by manipulating prices charged in transactions with parent firms or foreign subsidiaries.

The other source of disagreement between the tax advisors and the KRA is on downward adjustment of prices towards the end of the year when the financial results are being prepared.

The principle is that should a company realise that it had charged higher-than-market prices then it should be free to make a downward adjustment before finalising its financial results for the year and reduce tax exposure.

“The KRA does not want any downward adjustments to the price because that means it collects lower taxes than would otherwise have been the case. Yet this is legitimate exercise,” said Mr Kinuthia in an interview.

On the other hand, should a company realise that it had charged lower prices to its subsidiary or related party than is available in the market, it can then adjust them upwards.

Mr Kinuthia said that if the KRA was happy with an upward adjustment in price which would allow it to collect more taxes then it should also not oppose an adjustment in the opposite direction— downwards— as long as it is justifiable.

At a press briefing called by KPMG Kenya at Nairobi’s Serena Hotel last Thursday, the head of the audit firm’s global transfer pricing services, Sean Foley, said the world was now moving towards a new initiative to ensure that multinationals pay taxes in the jurisdictions where the profits are generated.

Mr Foley said the initiative dubbed “base erosion and profit shifting” (BEPS), being undertaken by the OECD, will see increasing focus on the activities of multinationals and the way they make their profits.