Transfer Pricing in Kenya: Compliance, Risks and Recent Developments
- Muhoro & Gitonga Associates
- Mar 27, 2024
- 6 min read
Updated: Oct 16
Table of Contents
Why Transfer Pricing Matters in Kenya
Legal and Regulatory Framework
Recent Reforms and Draft Rules
Advance Pricing Agreements and Finance Act Changes
Documentation Requirements and Record Keeping
Common Transfer Pricing Methods and Benchmarks
Recent Kenyan Cases and Judicial Trends
Practical Compliance Checklist for Businesses
How KRA Conducts Transfer Pricing Audits
Dispute Resolution and Appeals Pathway
Penalties, Interest and Best Practice Risk Management
Introduction
Transfer pricing refers to the method used to set prices for goods, services, or intangible assets exchanged between related entities within a multinational group. It plays a critical role in determining how profits and expenses are allocated among the various subsidiaries of the same corporation.
Properly applied, transfer pricing ensures that intercompany transactions reflect fair market value, promoting transparency and compliance with tax laws. It also helps multinational corporations manage their global tax exposure while maintaining accurate and reliable financial statements.
For multinationals operating in Kenya and Kenyan groups with related parties abroad, transfer pricing is a central tax risk area that demands proactive governance and polished documentation.
Why Transfer Pricing Matters in Kenya
Kenya has become more active in scrutinizing cross border related party transactions. Mispricing can lead to large adjustments interest and reputational damage. Investors and in-house tax teams must therefore treat transfer pricing as both a compliance obligation and a business planning tool.
Legal and Regulatory Framework
The starting point is section 18 of the Income Tax Act and the existing Transfer Pricing Rules, 2006 which incorporate the arm length principle and require related party transactions to be priced as if the parties were independent. Kenya also looks to the OECD Transfer Pricing Guidelines for interpretive guidance which courts and tribunals have referenced in decisions.
Recent Reforms and Draft Rules
The Kenya Revenue Authority (KRA) published Draft Income Tax Transfer Pricing Rules, 2023, to replace the older 2006 rules and to update requirements in light of global best practice. The draft rules were released for public comment and introduce clarifications on documentation CbC reporting and method selection.
Tax teams should monitor the KRA consultation process and incorporate the draft rule changes into their compliance calendars.
Advance Pricing Agreements (APAs) and Finance Act Changes
The Finance Act, 2025 has signalled a major development by proposing an Advance Pricing Agreement APA regime and procedural changes designed to provide certainty and reduce prolonged disputes. The APA regime which comes into force on the 1st of January 2026, allows taxpayers and the tax authority to agree in advance on the transfer pricing method for covered transactions for a specified period.
This change will materially alter dispute dynamics and is a reason to reassess audit posture and documentation strategies.
Documentation Requirements and Record Keeping
Kenya requires robust contemporaneous documentation including functional analysis contractual terms comparability studies and financial data supporting the chosen method. The accepted global model is a master file local file and where applicable a Country by Country Report.
Records should be kept for at least seven years and be immediately available on request during an audit. Failure to produce adequate documentation increases a taxpayer's exposure to adjustments and shifting of burden of proof.
Common Transfer Pricing Methods and Benchmarks
Kenya recognises the standard methods rooted in OECD practice. These include Comparable Uncontrolled Price CUP, Resale Price Method RPM, Cost Plus Transactional Net Margin Method TNMM, Profit Split and transactional methods for intangibles.
In practice Kenyan authorities frequently rely on transactional net margin and resale price methods in cases where internal or external comparables are scarce or where distribution and marketing functions dominate. Benchmarking must be defensible transparent and based on reliable databases.
Recent Kenyan Cases and Judicial Trends
Recent Tax Appeals Tribunal and High Court decisions illustrate practical enforcement trends and the evidentiary expectations on taxpayers. For example the Avic International Beijing (EA) Limited v Commissioner of Domestic Taxes (Tribunal Appeal E786 of 2023) [2024] KETAT 1601 (KLR) (22 November 2024) (Judgment) case explored the appropriateness of TNMM versus RPM and highlighted the Tribunal's focus on reliable benchmarking and functional analysis. The Tribunal has in other matters upheld KRA's adjustments where taxpayers failed to produce sufficient comparables or to substantiate functional differences. Case law shows courts referencing OECD guidance and emphasising that taxpayers bear primary responsibility for robust documentation.
In the decision of Cipla Kenya Limited v Commissioner of Domestic Taxes (Tax Appeal E422 of 2024) [2025] KETAT 223 (KLR) (2 May 2025) (Judgment), Cipla Kenya successfully challenged certain adjustments but the Tribunal carefully dissected statistical approaches such as median selection within interquartile ranges and the burden of proof on the taxpayer to justify adjustments to benchmarking outcomes. These decisions show that granular statistical and comparability arguments matter and that litigation outcomes can turn on technical benchmarking choices.
A number of other appeals including those involving large construction and manufacturing groups have reiterated the Tribunal's willingness to change methods where evidence supports the change and to require taxpayers to explain residency and substance for nonresident related parties. These rulings underline the need for governance over accounting policies contractual substance and intra group workflows.
Practical Compliance Checklist for Businesses
Conduct an annual risk assessment to identify high risk related party transactions and agree on internal thresholds for documentation.
Prepare master file and local file with robust functional analysis and contemporaneous comparability studies.
Maintain contracts transfer pricing policies and intercompany invoices and reconcile the transfer pricing policy to the financial statements.
Run sensitivity and benchmarking reviews periodically and update comparables when business models or market conditions change.
Consider APAs for long term predictable arrangements once the APA framework is enacted to reduce future dispute risk.
How KRA Conducts Transfer Pricing Audits
KRA initiates transfer pricing audits through desk reviews or field audits. Common triggers include unusual related party transactions rapid profit shifts inconsistent margins and whistleblower information.
During audits KRA may request benchmarking data transfer pricing files and intercompany agreements. Expect technical queries on the choice of method the selection of comparables and adjustments for functional differences. Prepare clear explanations and reconcile intercompany transfers with accounting and statutory tax returns.
Dispute Resolution and Appeals Pathway
Disputes start with tax assessments followed by internal objections and if unresolved escalation to the Tax Appeals Tribunal and ultimately the High Court. Recent Tribunal rulings are an important body of precedent and taxpayers should build litigation readiness into the compliance function by preserving evidence creating a litigation timeline and obtaining expert transfer pricing reports where material issues arise.
The availability of APAs should be viewed as an alternative avenue to reduce litigation exposure.
Penalties Interest and Best Practice Risk Management
Penalties and interest apply to understatements arising from transfer pricing adjustments. Penalties may be mitigated through voluntary disclosures and negotiation but depend on the facts and the taxpayer's conduct.
Best practice includes pre audit health checks external benchmarking reviews and senior stakeholder sign off on the transfer pricing policy. Consider combining transfer pricing with treasury policy and pricing systems to make compliance operational rather than manual.
Conclusion
Transfer pricing in Kenya is a high focus tax area that will continue to evolve. The direction is clear. regulators want predictable documentation transparent benchmarking and tools for certainty such as APAs.
Multinationals and Kenyan groups should act now to strengthen policies documentation and dispute preparedness. Early alignment of commercial contracts accounting practices and tax policies will reduce risk and improve outcomes in audits or tribunal proceedings.
Frequently Asked Questions (FAQ'S)
Q1: What are the basic documents KRA asks for in a transfer pricing review?
KRA typically requests a master file local file comparability studies intercompany agreements details on intangibles and any contemporaneous benchmarking analysis.
Q2: Are APAs available in Kenya now?
APAs are proposed in Finance Act, 2025 and come into force on the 1st of January 2026.
Q3: How long should I keep transfer pricing records?
Transfer pricing records should be retained for at least seven years to cover audit windows and potential litigation.
Q4: Which transfer pricing method is preferred in Kenya?
There is no single preferred method. The Tax Appeals Tribunal and KRA have supported TNMM RPM and CUP depending on facts. The key is that the method must be the most reliable for the transaction under the arm length principle.
Q5: Can local companies be exempt from CbC reporting?
Country by Country reporting thresholds mirror global norms and certain small or purely domestic groups may be out of scope. Check the specific rules and thresholds in the Income Tax Act and related regulations.
Q6: What should I do if KRA applies a different method to mine?
Engage transfer pricing counsel or advisors seek to supply missing comparables and functional analysis and consider appealing through the statutory objection then to the Tax Appeals Tribunal if unresolved. Where practical consider negotiating an APA once the regime is available.
Q7: Do Kenyan courts use OECD Guidance?
Yes Kenyan tribunals and courts have referenced OECD Transfer Pricing Guidelines in their reasoning and expect taxpayers to follow OECD analytical approaches.
Q8: How can a law firm help?
A law firm offers a blend of tax technical advice litigation support and negotiation skills. Legal teams add value by mapping legal risk to commercial outcomes drafting defensible documentation supporting benchmarking and representing clients in objections tribunals and judicial review.
Further Reading
