Treasury tightens noose on tax-avoiding multinationals


The National Treasury building in Nairobi in this picture taken on March 15, 2023. PHOTO | DENNIS ONSONGO | NMG

The Treasury has moved to seal loopholes allowing multi-national corporations to avoid taxes through intercompany related transactions.

New draft Income Tax (Transfer Pricing) Rules have 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 draft rules 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.

“The main intention is to try to bring into focus transparency in terms of inter-party related dealings and ensure there is no tax avoidance through the repatriation of profits. Businesses are evolving and the rules today are not as elaborate as they were previously,” Kevin Chege, manager tax and transfer pricing at PKF Eastern Africa told the Business Daily.

Transfer pricing rules are geared at providing guidelines to be applied by related enterprises, in determining the price set for inter-company transactions (arm’s length prices) and provide administrative regulations, including the types of records and documentation to be submitted to the Kenya Revenue Authority commissioner.

Multinationals will, for instance, be required to provide a detailed description of the controlled transactions stating parties involved, timing, transaction value, settlement currency and contractual terms and conditions. Transfer pricing rules seek to prevent transfer pricing manipulation, which increases the risk of capital flight and shifting of profits by multinational enterprises.

The KRA Commissioner General has earned enhanced powers to ask for additional information from related parties in implementing the transfer pricing rules.

The proposed changes are, however, expected to result in additional compliance requirements for multinational enterprises.

“The proposed rules will increase the documentation requirement for taxpayers with related party transactions in Kenya. Taxpayers must ensure that transfer pricing policies documented are robust and adequately updated to align with actual occurrence. We expect increased queries arising from the additional information request from KRA,” said John Kamunyi, manager tax and regulatory services at KPMG.

“This will be verified against third parties and data obtained from exchange of information through the Mutual Administrative Assistance Convention which Kenya is party to.”

Kenya’s transfer pricing legislation was first implemented under the Income Tax Act of 1973 but supplementary regulations were only subsequently issued in 2006.

The rules borrow heavily from the Organisation for Economic Co-operation and Development Transfer Pricing Guidelines.

Transfer pricing has become a common practice with the rise of globalization and growth in international trade.

The exchequer has been ironing out amendments to guard against the loss of tax revenues through transfer pricing/ inter party transactions.

KRA handles disputes transfer pricing through its transfer pricing audit unit which was established in 2009.

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