Treasury Strengthens Grip on Tax-Evading International Corporations

The Treasury has taken efforts to close the gaps that allowed multinational firms to evade taxes through intercompany business dealings.

The proposed new draft Income Tax (Transfer Pricing) Rules would broaden the types of transactions covered by the transfer pricing rules to include transactions using derivatives, cost contribution arrangements, and insurance and reinsurance.

Additionally, the draft guidelines suggest adding guarantees, the purchase or sale of marketable securities, as well as any kind of advance, payment, or deferred payment or receivable, to the list of financial transactions that qualify as interparty transfers.

“The main intention is to try to bring into focus transparency in terms of inter-party related dealings and ensure there is no tax avoidance through the repatriation of profits. Businesses are evolving and the rules today are not as elaborate as they were previously,” Kevin Chege, manager tax and transfer pricing at PKF Eastern Africa told a local daily.

Transfer pricing regulations are intended to give related businesses guidelines to follow when determining the price to be used for inter-company transactions and to provide administrative rules, such as the kinds of records and documentation that must be submitted to the commissioner of the Kenya Revenue Authority.

For example, multinationals will be expected to submit a thorough explanation of the controlled transactions, including the individuals engaged, the timing, the transaction value, the currency used for settlement, and the terms and circumstances of the contract. Transfer pricing manipulation raises the danger of capital flight and profit shifting by multinational corporations, which is why transfer pricing restrictions are intended to prevent it.

In order to implement the transfer pricing regulations, the KRA Commissioner General has been granted expanded authority to inquire of associated parties for more information.

However, it is anticipated that the proposed reforms will result in increased compliance obligations for global businesses.

“The proposed rules will increase the documentation requirement for taxpayers with related party transactions in Kenya. Taxpayers must ensure that transfer pricing policies documented are robust and adequately updated to align with actual occurrence. We expect increased queries arising from the additional information request from KRA,” said John Kamunyi, manager tax and regulatory services at KPMG.

“This will be verified against third parties and data obtained from exchange of information through the Mutual Administrative Assistance Convention which Kenya is party to.”

Kenya’s transfer pricing restrictions were first put into effect under the Income Tax Act of 1973, but additional regulations weren’t released until 2006 after that.

The Transfer Pricing Guidelines of the Organization for Economic Co-operation and Development are widely referenced in the regulations.

With the expansion of international trade and the emergence of globalization, transfer pricing has become a widespread practice.

In order to prevent the loss of tax revenues due to transfer pricing and inter party transactions, the exchequer has been working on modifications.

Through its 2009-founded transfer pricing audit team, KRA addresses transfer pricing disputes.