The draft Income Tax (Transfer Pricing) rules, 2023

On 4 September 2023, the Cabinet Secretary, National Treasury and Economic Planning, published the Draft Income Tax (Transfer Pricing) Rules, 2023 (Draft TP Rules 2023 or ‘the rules”) for public input and comments. The Draft TP Rules 2023 propose to revoke the Income Tax (Transfer Pricing) Rules, 2006 (TP Rules 2006) which are currently in force.

In response to increased growth of international trade and commerce and to align to global efforts to combat base erosion and profit shifting (BEPS), the government has over the last two years introduced comprehensive regulations to govern controlled or related party transactions in Kenya. The Draft TP Rules 2023 complement the changes introduced through the Finance Act, 2022 on country by country (CbC) reporting and transfer pricing documentation filing requirements for multinational entities (MNEs) in Kenya.

The Draft TP Rules 2023 are substantially modelled on the Organization for Economic Cooperation and Development (OECD) and Africa Tax Administration Forum (ATAF) suggested approaches for drafting transfer pricing legislation. We discuss the key changes below;

The Draft TP Rules 2023 have aligned the scope of covered transactions to Section 18 of the Income Tax Act, Cap 470 Laws of Kenya (ITA), to include;

1. Non-resident person carrying on business in Kenya with a related resident person or permanent establishment; 
2. A resident person carrying on business with a related person operating in a preferential tax regime; 
3. A resident person carrying on business with a non-resident person located in a preferential tax regime; 
4. A resident person carrying on business with an associated enterprise of a non-resident person located in a preferential tax regime; and 
5. A resident person carrying on business with a permanent establishment of a non-resident person operating in Kenya where the non-resident person is located in a preferential tax regime.

The inclusion of the scope of covered transactions to encompass a broad spectrum of transactions and presents an additional level of scrutiny for multinational entities and their associated persons operating in Kenya to consider the levels of transparency and exchange of information in the jurisdictions where they conduct business.

The Draft TP Rules 2023 have expanded the scope of transactions subject to the adjustment of prices. In addition to the transfer of goods or services, loans and any other transaction that may affect the profit or loss of an entity, the rules shall be applicable to;

• financing transactions, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business; 
• insurance and re-insurance transactions; 
• a transaction of business restructuring or reorganisation entered into by a person with an associated person, irrespective of the fact that it has bearing on the profit, income, losses or assets of such persons at the time of the transaction or at any future date; 
• Cost contribution arrangements; and 
• Transactions involving derivatives.

The expanded scope of transactions carries noteworthy implications for MNEs operating in Kenya. Businesses engaging in dealings involving loans, insurance, restructuring, shared costs, and derivatives, will be required to ensure that their pricing aligns to the arm’s length principle and be prepared for increased tax authority scrutiny.
 

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