The tribunal ruled that Betta Healthcare's appeal failed after the drug manufacturer failed to furnish the taxman with some documents which showed that it had priced its products appropriately. PHOTO | SHUTTERSTOCK
Betta Healthcare will pay the Kenya Revenue Authority (KRA) Sh480.1 million in additional taxes and penalties after the Mara Moja painkiller manufacturer sold drugs to its affiliates in the region at relatively lower prices compared to other business partners.
The Tax Appeals Tribunal agreed with the KRA’s assessment which found that the prices charged by Betta Healthcare for identical goods in export sales were lower than those it charged for domestic sales.
By charging relatively lower prices for identical goods, the KRA reckoned that the drug maker might have reduced its tax liability by shifting profits to its affiliates in Uganda and Tanzania through what is known as transfer pricing.
The tribunal ruled that Betta Healthcare's appeal failed after the drug manufacturer failed to furnish the taxman with some documents which showed that it had priced its products appropriately.
“The upshot of the foregoing is that the Appeal lacks merit and consequently, the Tribunal proceeds to make the following Orders…The Appeal is hereby dismissed,” said the Tribunal.
Betta Healthcare had disputed the method that the KRA used to reach the conclusion that sales to its affiliates did not meet the arm’s length principle.
With the arm’s length principle, the price agreed in a transaction between two related parties must be the same as the price agreed in a comparable transaction between two unrelated parties.
Betta Healthcare had argued that while the goods were identical, the circumstances were different, arguing that, for example, the standard of living in Tanzania and Uganda was lower than in Kenya.
Betta manufactures over-the-counter drugs such as Hedex, Action, Cofta, Good Morning, Mara Moja, and Salamia.
In 2005, KRA’s attempts to collect an additional tax from Unilever Kenya after the latter charged lower prices for goods it supplied to its affiliate in Uganda, was thwarted after the fast-moving consumer goods company argued that there were no regulations to guide the transfer pricing.
Transfer pricing refers to the setting of prices for transactions occurring between associated entities. Sometimes, firms tend to manipulate the transfer pricing.
Following the Unilever case, the KRA issued the Income Tax (Transfer Pricing Rules) 2006, which heavily borrowed from the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines.
Under the OECD rules, companies are required to price transactions as if they occur between third parties and provide tax authorities with accurate evidence of how the price was determined.
Each firm that does business with a related part across the border has to have its own transfer pricing policy.
In 2022, the KRA announced that it had opened investigations against food producer Kakuzi over allegations of paying less tax as a result of cross-border financial deals with its majority shareholder Camellia Plc.
