A key concern by tax agencies is that some multinational companies sometimes misuse the transfer pricing window by changing their taxable income.
The Kenya Revenue Authority(KRA) plans to install a new transfer pricing database that will enable its agents to gather and compare transactions made by multinational firms to seal loopholes for tax evasion.
The taxman said the transfer pricing database will assist its officers in compiling, analysing and managing data from cross-border company transactions to ensure compliance with tax obligations.
“A common concern in developing economies relates to difficulties in accessing the information on “comparables”, that is, data on transactions between independent parties used in the application of the arm’s length principle,” said the KRA.
Transfer pricing is an accounting practice that represents the price that one division in a company charges another division for goods and services provided. The transfer pricing practice extends to cross-border transactions as well as domestic ones and can also be applied to intellectual property such as patents, royalties and research.
Multinational corporations are lawfully allowed to use the transfer pricing technique to allocate earnings among their subsidiary and affiliate companies that are part of the parent organisation. A firm may calculate the minimum acceptable transfer price as equal to the variable costs or equal to the variable costs plus a calculated opportunity cost.
Although transfer pricing can lead to tax savings for corporations, tax authorities worldwide have expressed reservations about the strategy amid concern that some multinationals abused the accounting scheme to dodge taxes.
“The KRA is desirous of having access to a transfer pricing benchmarking tool database that will enhance transfer pricing audits of multinational enterprises and audit of companies in extractive industries,” KRA said.
A key concern by tax agencies is that some multinational companies sometimes misuse the transfer pricing window by changing their taxable income, thus reducing their overall taxes due for payment.
Many companies use the transfer pricing mechanism to shift tax liabilities to low-cost tax jurisdictions.
KRA said the transfer pricing database will compile financial accounts and loans, royalty as well service agreements filed by companies with the relevant administrative bodies and presented in an electronic format suitable for searches and statistical analysis.
“The solution should include pricing and margin-based information on the manufacturing of goods, distribution of goods, financial transactions, services, royalty agreements, and other cross-border transactions and enable benchmark studies to be effected on affected transactions,” the taxman said as it invited a supplier for the transfer pricing database.
The move by KRA comes months after the National Treasury published draft Income Tax (Transfer Pricing) Rules which proposed to expand the scope of transactions subject to the transfer pricing rules to include insurance and reinsurance transactions, cost contribution arrangements, and transactions involving derivatives.
The rules published in September 2023 also propose the expansion of financial transactions qualifying as interparty transfers to include guarantees, the purchase or sale of marketable securities, or any type of advance, payments, or deferred payment or receivable.
Besides the crackdown on transfer pricing cheats, Treasury Cabinet Secretary Njuguna Ndung’u on January 27, 2023, also signed the Tax Procedures (Common Reporting Standards) Regulations, 2023 which granted the KRA unrestricted access to information on secret bank accounts held by Kenyans in 106 foreign countries amid stepped-up purges on tax dodgers and beneficiaries of illicit wealth.
Under the rules, all Kenyan banks, trusts, and other resident financial firms, including local branches of non-resident financial institutions, are required to report to the taxman information on foreigners’ bank account numbers, names, addresses, residences, Tax Identification Numbers (TINs), date and place of birth and persons listed as its beneficiaries.
KRA would then share this information with the participating 106 countries, including popular tax havens such as Switzerland, Panama, Cayman Islands, Bermuda, the British Virgin Islands, Mauritius, Jersey, and Monaco, and in turn, receive from them information on Kenyans holding bank accounts in their jurisdictions.
Where bank accounts are held by companies, information on registered owners of the entities will be reported. Also to be disclosed is the amount of money held in the accounts or the value of the accounts and their surrender value if insured.
For custodial accounts, the institutions will be required to report the total gross interest, dividends, and income credited to the accounts during the year and proceeds from the sale or redemption of any financial assets credited to the accounts.
The regulations published by Prof Ndung’u also require the financial entities to review all existing accounts with balances of above $250,000 (Sh32.79 million) as of December 31, 2023.
