For multinationals, a new era of tax transparency starts

In October 2015, the OECD/G20 published the country-by-country (CbC) reporting action plan, recognising that enhancing transparency for tax administrations by providing them with adequate information to conduct transfer pricing risk assessments is an essential part of tackling the base erosion and profit shifting (BEPS) problem.

CbC reporting requires large multinational enterprises (MNEs) to file a report providing a breakdown of the amount of revenue, profits, taxes and other indicators of economic activities for each tax jurisdiction in which the MNE group does business.

Based on the OECD rules, CbC reporting only applies to MNE groups with annual consolidated group revenue of €750 million or more in the preceding fiscal year. Tax authorities can use the CbC information to perform high-level transfer pricing risk assessments and to evaluate other BEPS-related risks.

What this means for multinationals in Kenya

The Finance Act 2021 introduced CbC reporting on Kenyan-headquartered MNE groups, with effect from January 1, 2022.

In a bid to provide clarity on the CbC reporting requirements, the Cabinet Secretary for Treasury issued the draft Income Tax (Country-By-Country Reporting Standards for Multinational Enterprises) Regulations 2021 and invited the public to submit their views on the draft regulations.

Per the regulations, Kenyan-headquartered MNEs whose consolidated revenue is at least €20 million are now required to file an annual CbC report with the Kenya Revenue Authority (KRA).

The CbC report will contain information relating to capital, revenues, tax paid and accrued, assets and number of employees for each jurisdiction in which the MNE operates.

Qualifying MNEs which do not adhere to the regulations shall be subject to the penalties prescribed under the Tax Procedures Act, 2015.

The KRA will derive several benefits from the new requirements. The KRA can use the CbC reports to make high-level assessments of an MNE’s transfer pricing and BEPS risk, including assessing potential non-conformity to transfer pricing rules by members of the MNE group.

The KRA can also use the information in the CbC reports for economic and statistical analysis. Further, with Kenya being a signatory to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, it is also expected that the CbC reports will be used by the KRA to exchange relevant information with other countries, and gain visibility of additional tax risks beyond our borders.

However, the KRA cannot use the information in the CbC reports to make transfer pricing adjustments. Accordingly, the information in CbC report cannot be used, by itself, to reassess a taxpayer’s income, or as conclusive proof of the appropriateness of the transfer prices within an MNE.

The KRA is also mandated to preserve the confidentiality of the information contained in CbC reports, which is crucial as some of the information shared is sensitive and can have market implications should it be accessed by unauthorised parties.

For Kenyan-headquartered MNEs that meet the set turnover threshold of €20 million or Sh2.5 billion, which is rather low, the main implications of the CbC reporting requirements are the increased transfer pricing compliance and transparency on their business affairs.

The information disclosed in the CbC reports will provide the KRA with an avenue to make extended enquiries into the MNEs’ operations. The affected MNEs will thus encounter increased compliance costs arising from additional reporting and filing obligations.

To ease this burden, MNEs must prepare for the annual filing of CbC reports by assessing how to collate the required information from different sources in a timely manner.

The MNEs should consider, for instance, digitising their data and introducing tools to easily collate the required information, particularly since the CbC reports are to be filed electronically.

Moreover, given that the principal purpose of CbC reports is for the KRA to enhance its transfer pricing risk assessment capacity, MNEs should consider reviewing the CbC reports before filing to ensure their alignment with the group transfer pricing policies. Any inconsistencies between the two will likely be flagged as indicators of tax risks.

Beyond compliance, affected MNEs need to have a closer look at how the information to be provided can be interpreted. This requires an upfront review of the CbC Reports to determine how the CbC data such as global allocation of profits could be perceived by tax authorities.

MNEs should thus put together a strategy and systems before the first CbC report filing period to enable them to discharge their obligations in a timely, accurate and efficient manner, and avoid the attendant penalties.

Gathecha is Tax Associate and Shaba is Tax Manager, Deloitte