Effective July 1, 2022, entities in Kenya that are members of a multinational enterprise group (MNE) whose annual turnover is at least Sh95 billion will be required to submit transfer pricing documentation in three tiers to the Kenya Revenue Authority.
This three-tiered documentation consists of a country-by-country report (CbCR), master file and local file. How do you know if you are a member of an MNE under the new rules?
You are a member of an MNE group if your financial results using applicable accounting standards, are consolidated into the results of another related entity.
In October 2015, the Organisation for Economic Co-operation & Development (OECD) rolled out a 15-action plan aimed at modernising the international tax system.
One of the proposals of this 15-action plan was to promote tax transparency through CbCR reporting. The rules targeted the world’s largest MNEs with a group annual consolidated turnover of more than €750 million (Sh95 billion).
The high threshold is a result of sentiments that given the increased compliance burden anticipated in the preparation of the documentation, there needed to be a fair balance between, on one hand, the increased compliance cost to taxpayers and on the other, the benefit to tax authorities.
At the time, it was estimated that MNEs controlled more than 90 per cent of the world’s corporate income tax revenues.
Therefore, restricting the CbCR rules to these MNEs would be a fair place to start with an expectation that the threshold would be lowered with time.
The CbCR reporting allows tax authorities to access information on MNEs for them to assess whether there could be aggressive tax planning.
Historically, the capability of the MNE group to share information cross-order has by far outpaced that of tax authorities.
Simply put, information access was highly skewed with members of an MNE group sharing information extremely efficiently while different tax authorities were barely sharing any information.
CbCR reporting decentivises MNEs from engaging in aggressive tax planning because they know that the authorities are talking to one another about them, through the automatic exchange of information.
In terms of the contents, CbCR reporting is as easy as the name sounds — mandating MNEs, to report, on a country-by-country basis, certain prescribed financial indicators such as revenues, profits, taxes and assets held, among others.
Using an information exchange framework, countries are then able to exchange this information, on an automatic basis and hence are better equipped in carrying out tax and transfer pricing audits.
Which entity in a multinational enterprise group would be best placed to make a CbCR report?
This is of course the parent company that consolidates accounts for financial reporting purposes based on applicable accounting standards such as IFRS.
This is expected given that the parent entity is the entity within the group most capable of exercising control over its members to obtain the required information with regard to its members' activities.
Ordinarily, where the parent company files the CbCR report in its own tax jurisdiction, its subsidiaries should not have an obligation to make the report.
The adoption by Nairobi of the three-tiered documentation approach as proposed by the OECD BEPS action plan consisting of a country-by-country report, master and local file is a clear and strong indication of Kenya’s commitment to modernise its tax system in line with established international best practices.
The writer is an Associate Director, Tax and Transfer Pricing at PwC Kenya
However, for this mechanism to work, countries in which the MNE group has a presence in should have signed up to a framework for automatic exchange of CbCR reports so that they are able to, both receive reports filed in other countries and also exchange reports filed in their country. This framework is known as the Competent Authority Agreement framework or the Multilateral Competent Authority framework on exchange of CbC reports (CbCR MCAA). Although over 90 countries have signed up to this multilateral framework, Kenya is yet to do so. This means that although CbCR reports may have been filed in the parent entity jurisdiction, the local entity based in Kenya that is a member of an MNE group with annual consolidated turnover of at least KES 95 billion, will still be required to make the local filing.
Looking at the requirements for filing of a master and local file, the Kenyan member of the MNE group will be required to also file on annual basis, the master and local file.