Transfer Pricing in Kenya: Guide for Multinationals

Transfer Pricing in Kenya – A Simple Guide for Multinationals

June 5, 2025

Transfer Pricing provides rules and regulations on how transactions between related or associated enterprises – often within Multinational Enterprise Groups (MNEs) – are priced.

These transactions include the transfer of goods, services, intellectual property, financing arrangements, and more.

In this comprehensive and SEO-optimized guide, we explore Kenya’s transfer pricing legal framework, recent developments, including updates from the Finance Bill 2025, and provide answers to frequently asked questions.

Introduction to Transfer Pricing

Transfer pricing refers to the pricing of transactions – such as goods, services, intellectual property, and financing – between related or associated enterprises within Multinational Enterprise Groups (MNEs).

In Kenya, all such transactions must follow the arm’s length principle, meaning they should be priced as if the entities were independent and unrelated.

This principle helps prevent artificial profit shifting and ensures tax compliance.

Kenya’s transfer pricing framework is governed by the Income Tax Act (CAP 470) and enforced by the Kenya Revenue Authority (KRA).

Why Transfer Pricing Was Introduced in Kenya

Transfer pricing was introduced in Kenya to prevent tax evasion and profit shifting that eroded the domestic tax base. The primary objectives include:

Preventing base erosion: Reduces taxable income manipulation through deductions and payments.
Preventing artificial profit shifting: Stops MNEs from shifting profits to low or no-tax jurisdictions.
Aligning with global standards: Implements OECD’s BEPS (Base Erosion and Profit Shifting) framework.
Protecting Kenya’s tax revenue: Ensures taxes are paid where economic activity occurs.

Brief History of Transfer Pricing in Kenya

Year	Development
2006	– KRA issued a legal notice No. 67 introducing the Income Tax (Transfer Pricing) Rules. – This laid the foundation for transfer pricing in Kenya i.e. determining the arm’s length pricing of transactions between related enterprises
2015	– Kenya endorsed the Global OECD’s combating Base Erosion and Profit Shifting (BEPS) initiative. – This aligned Kenya’s national policy with global tax standards.
2021	– The Kenya Revenue Authority (KRA) revised Transfer Pricing (TP) documentation requirements aligning with global OECD’s guidelines
2023	– Kenya published the Draft Income Tax(Transfer Pricing) Rules,2023 revolving the Income Tax Rules (2006). – This introduced aspects like Country by Country (CbC) reporting and transfer pricing documentation filing requirements for MNES in Kenya.
2025	– The Finance Bill 2025 has proposed new disclosures and introduces Advance Pricing Agreements (APs)

Types of Transfer Pricing Methods

Kenya uses OECD-aligned methods to determine arm’s length pricing:

Comparable Uncontrolled Price (CUP) Method – Compares related-party prices with independent market prices.
Resale Price Method – Uses resale price minus a margin to determine the transfer price.
Cost Plus Method – Adds a markup to the cost incurred by the supplier.
Transactional Net Margin Method (TNMM) – Compares net profit margins from related-party and independent transactions.
Profit Split Method – Allocates profits based on functions performed and assets used.

2023 Transfer Pricing Rules and Developments

In September 2023, Kenya released Draft Income Tax (Transfer Pricing) Rules, 2023, revoking the 2006 rules and aligning with OECD and ATAF guidelines.

The Draft Transfer Pricing Rules, 2023 introduced several key requirements:

1. Mandatory Documentation:

Taxpayers must maintain:

A Master File detailing the global business operations of the MNE group.
A Local File with detailed Kenyan transaction information.
A Country-by-Country Report (CbCR) for MNEs with consolidated group revenues over EUR 750 million (as per Finance Bill 2024)

2. Form TP Filing:

MNEs are required to:

Prepare and file Form TP annually.
Include transaction-level details.
Submit together with the annual income tax return.

3. Stricter Penalties:

Penalties for non-compliance include:

A fine of KES 100,000 or 10% of the tax payable, whichever is higher.
Disallowance of deductions for undocumented related-party transactions.

4. Enhanced Risk Profiling:

KRA has adopted audit analytics to identify high-risk sectors such as:

Pharmaceuticals
Digital economy
Transactions involving intangibles

5. CbCR Requirements:

CbCR is now formally required:

Must be filed by the ultimate parent entity or surrogate parent entity in their tax jurisdiction.
Penalties apply for non-submission or misreporting.

6. Scope Alignment:

The 2023 TP Rules apply to:

Non-residents doing business in Kenya with related resident entities or permanent establishments.
Residents transacting with related entities in preferential tax regimes.
Residents engaging with associated enterprises of non-residents in preferential regimes.
Kenyan permanent establishments of non-resident persons in preferential tax regimes.

Key Provisions of Transfer Pricing in Kenya

Documentation Requirements

Document	Description	Requirement
Master File	This file describes the MNE’s organizational structure, business activities and overall TP policies.	Maintain annually; submit on request
Local File	This document is Kenya Specific and includes a detailed analysis of an MNE’s intercompany transactions.	Maintain annually; submit on request
CbCR (Country By Country)	This document provides an overview of the MNE group’s global income allocation, taxes paid, and the nature of activities in each jurisdiction.	Mandatory for groups annual turnover of > EUR 750M

Compliance Requirements for Multinationals

To comply with transfer pricing rules in Kenya, MNEs must:

Maintain updated TP documentation.
Submit Form TP annually.
File CbCR where applicable.
Provide documentation within 30 days upon KRA request.

Penalties for Non-Compliance

KES 100,000 or 10% of the tax payable.
Additional penalties for tax shortfalls or avoidance may apply.

Finance Bill 2025 Proposals on Transfer Pricing

1. Advance Pricing Agreements (APAs)

The Finance Bill 2025 introduces Advance Pricing Agreements (APAs) under Kenyan tax law:

Definition: An APA is an agreement between a taxpayer and KRA to determine the transfer pricing method for future transactions.
Eligibility: Applicable to non-residents with a permanent establishment in Kenya, or residents transacting with entities in preferential tax regimes.
Duration: Valid for up to 5 consecutive years.

2. Enhanced Disclosures

Mandatory Disclosure Rules (MDRs) for high-risk or aggressive transfer pricing schemes.

3. Focus Areas

Digital economy, IP licensing, software, cloud services, and intangible transactions.

4. Enforcement of CbCR:

Finance Bill 2025 provides full implementation of reporting obligations for FY2024 Onwards.

Benefits of Transfer Pricing Regulations

Promotes transparency and fairness.
Reduces risk of audits and penalties.
Provides certainty to taxpayers.
Aligns Kenya with global tax standards.
Encourages foreign direct investment (FDI).

Frequently Asked Questions (FAQs)

1. Who must comply with transfer pricing regulations?

Any MNE or Kenyan business involved in related-party transactions regardless of size.

2. What is artificial profit shifting?

The manipulation of internal transactions to move profits to low-tax jurisdictions using transfer pricing, licensing etc.

3. What is base erosion?

Reduction of the taxable income base through excessive deductions or mismatches.

4. What if I don’t keep proper Transfer Pricing documentation?

You risk penalties and disallowance of deductions.

5. What’s the CbCR Filing threshold?

MNEs with global turnover exceeding EUR 750 annually must file their CbCR reporting.

6. Are domestic transactions covered?

Yes, related-party domestic transactions are also scrutinized.

7. Which sectors are high risk?

Pharmaceuticals, digital/tech services, and finance.

Conclusion

Kenya’s transfer pricing regime is evolving rapidly, with reforms like the introduction of APAs and enhanced disclosure obligations under the Finance Bill 2025.

Multinationals must stay proactive, maintain robust documentation, and adopt compliant pricing strategies.

Once enacted, the Cabinet Secretary is expected to issue APA implementation guidelines to enhance predictability and reduce disputes.

Need help navigating compliance?

Reach out to the experts at Bubi & Alexander for tailored support in documentation, benchmarking, and strategic tax planning.

Disclaimer

This guide is for informational purposes only and does not constitute professional advice. For tailored guidance, Consult Bubi & Alexander or your tax advisor.

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