The Income Tax (Transfer Pricing) Rules, 2006 in Kenya were introduced to provide guidelines for related enterprises in determining arm’s length prices for goods and services in transactions between them. These rules were enacted following a landmark case involving the Commissioner of Income Tax and Unilever Kenya Limited, which highlighted the need for clear transfer pricing legislation.Key aspects of the 2006 rules include:

1. They were adopted from the Organisation for Economic Co-operation and Development (OECD) guidelines, which are applicable in many countries.
2. The rules recognize five methods for determining arm’s length prices in transactions.
3. They empower the Commissioner of Domestic Taxes (KRA) to request transfer pricing documentation from multinational enterprises operating in Kenya.
4. The rules apply to transactions such as purchase, sale, transfer, lease or use of tangible and intangible property, provision of services, and financing transactions.
5. They came into effect on July 1, 2006.

However, it’s important to note that these rules are currently under revision. The Draft Income Tax (Transfer Pricing) Rules, 2023 have been proposed to replace the 2006 rules. This revision aims to align the transfer pricing regulations with recent changes in Kenya’s tax laws and international best practices, including the introduction of Country-by-Country Reporting requirements for multinational entities.

Country by Country Reporting

The Income Tax (Transfer Pricing) Rules, 2006 in Kenya and Country-by-Country (CbC) reporting are related but distinct aspects of Kenya’s transfer pricing regulations. Here’s how they are connected:

Original 2006 Rules

The Income Tax (Transfer Pricing) Rules, 2006 did not include provisions for Country-by-Country reporting. These rules primarily focused on:

1. Providing guidelines for determining arm’s length prices for transactions between related enterprises.
2. Recognizing five methods for determining arm’s length prices.
3. Empowering the Commissioner of Domestic Taxes to request transfer pricing documentation.

Evolution and CbC Reporting

Since 2006, there have been significant developments in transfer pricing regulations globally, including the introduction of CbC reporting. Kenya has been working to align its transfer pricing rules with these international standards:

1. The Finance Act, 2022 introduced Country-by-Country Reporting requirements for multinational entities operating in Kenya.
2. Section 18(B) of the Income Tax Act Cap 470 of the Laws of Kenya introduced the CbC reporting legislation, although it was noted as a work in progress.
3. The proposed CbC regulations are fully in line with the BEPS Action 13 three-tier approach, which includes Master File, Local File, and Country-by-Country Report.

Draft Income Tax (Transfer Pricing) Rules, 2023

To address the gap between the 2006 rules and current international standards, Kenya has proposed new transfer pricing rules:

1. The Draft Income Tax (Transfer Pricing) Rules, 2023 are intended to replace the 2006 rules.
2. These new rules complement the changes introduced through the Finance Act, 2022 on Country-by-Country reporting.
3. The draft rules align with Kenya’s principal tax laws and include legislation on universally accepted best practices such as those adopted under the OECD/G20 BEPS project, including Country-by-Country Reporting.

In summary, while the original 2006 rules did not address CbC reporting, the evolving regulatory landscape in Kenya has led to the introduction of CbC reporting requirements and the proposal of new transfer pricing rules that incorporate these international standards.