Transfer pricing refers to the pricing of goods, services, intangible property, financing, or other transactions between related parties (such as subsidiaries of a multinational enterprise) in different tax jurisdictions. In Kenya, the primary objective of transfer pricing regulations is to ensure that such transactions are conducted at arm's length—meaning prices and terms comparable to those between independent entities—to prevent profit shifting and base erosion.

Kenya's transfer pricing framework is governed principally by Section 18 of the Income Tax Act (Cap 470), as amended, which empowers the Commissioner of the Kenya Revenue Authority (KRA) to adjust taxable income where related-party transactions do not reflect arm's-length conditions. The regime aligns closely with the OECD Transfer Pricing Guidelines (with some influence from UN guidelines), and Kenya is an observer in the OECD's Inclusive Framework on BEPS.

Key Legal Provisions

  • Arm's Length Principle: Enshrined in Section 18(3) and related subsections, requiring that income derived from related-party transactions be determined as if the parties were independent.
  • Scope: Applies to controlled transactions involving residents and non-residents, including goods, services, intangibles, loans, and cost-sharing arrangements. Recent amendments (via Finance Acts) have broadened the definition of related parties and strengthened enforcement.
  • Accepted Methods: Kenya recognizes the five traditional OECD methods—Comparable Uncontrolled Price (CUP), Resale Price, Cost Plus, Transactional Net Margin (TNMM), and Profit Split—along with other methods where appropriate, provided they produce the most reliable arm's-length result.

Documentation Requirements

Taxpayers engaged in related-party transactions must prepare and maintain contemporaneous transfer pricing documentation. Kenya follows the OECD's three-tiered approach:

  • Master File: Provides a high-level overview of the multinational group's global operations, business, and transfer pricing policies.
  • Local File: Details specific related-party transactions of the Kenyan entity, including functional analysis, economic analysis, and selection/justification of the transfer pricing method.
  • Country-by-Country (CbC) Report: Mandatory for multinational groups with consolidated revenue exceeding approximately KES 95 billion (threshold aligned with OECD standards). The ultimate parent entity or designated surrogate files the report, with notifications required in Kenya.

Documentation must be prepared annually and submitted to the KRA upon request, typically within 30 days (though some sources reference up to six months for certain elements in practice). Failure to maintain adequate documentation may result in adverse adjustments by the KRA, including penalties.

Recent Developments (as of 2026)

A significant advancement is the introduction of the Advance Pricing Agreement (APA) regime through the draft Income Tax (Advance Pricing Agreement) Regulations, 2025, published by the KRA in late 2025. Effective from January 1, 2026, this framework allows taxpayers to negotiate and agree in advance with the KRA on the transfer pricing methodology and pricing for specified related-party transactions over a fixed period (typically 3–5 years, with possible renewal). APAs aim to provide tax certainty, reduce disputes, and align Kenya's practices with international standards. The regime covers unilateral, bilateral, and multilateral APAs, with procedures for pre-filing consultations, applications, negotiations, execution, monitoring, and potential revisions or cancellations.

Compliance and Risks

Non-compliance exposes taxpayers to:

  • Transfer pricing adjustments leading to additional tax, interest, and penalties.
  • Potential double taxation in cross-border cases (mitigated through mutual agreement procedures under Kenya's double tax treaties).
  • Increased scrutiny during KRA audits, particularly for high-value intangibles, intra-group services, and financing transactions.

Multinational enterprises and Kenyan entities with significant related-party dealings are advised to conduct regular transfer pricing reviews, benchmark analyses, and maintain robust documentation. Professional advice from qualified tax advisors is recommended to navigate complexities and leverage tools such as APAs.

For the most current official guidance, consult the KRA website or relevant publications, as regulations continue to evolve in line with global developments

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