By Mukamba & Company Advocates

In an era of heightened global tax scrutiny, multinational corporations (MNCs) operating in Kenya must prioritize compliance with the country’s transfer pricing regulations.

Non-compliance risks costly disputes with the Kenya Revenue Authority (KRA), reputational damage, and financial penalties. This guide unpacks Kenya’s transfer pricing framework, highlights real-world cases, and offers actionable strategies to safeguard your business while fostering trust with stakeholders.

Understanding Transfer Pricing in Kenya

Transfer pricing refers to the pricing of transactions between related entities, such as subsidiaries, parent companies, or affiliates across borders. While legitimate, these transactions can be manipulated to shift profits to low-tax jurisdictions, depriving Kenya of its fair tax share.

To combat this, Kenya’s transfer pricing rules—anchored in the Income Tax Act (ITA) and aligned with OECD guidelines—mandate that cross-border transactions between connected parties reflect arm’s length principles (i.e., prices comparable to those charged between independent entities).

Kenya’s economy, with its growing sectors like agriculture, mining, fintech, and manufacturing, attracts significant foreign investment.

However, the KRA has intensified audits on cross-border transactions, particularly targeting intra-group services, intellectual property licensing, and commodity trading. For MNCs, this means robust compliance is no longer optional—it’s a business imperative.

Legal Framework: Key Provisions

1. Section 18 of the Income Tax Act: Requires transactions between related parties to comply with arm’s length standards.
2. 2021 Transfer Pricing Regulations: Introduce stringent documentation requirements, including Master Files (global operations overview), Local Files (Kenya-specific transactions), and Country-by-Country Reports (CbCR).
3. OECD Guidelines: Kenya adopts OECD principles for benchmarking and dispute resolution, ensuring global alignment.
4. 2023 KRA Guidelines: Emphasize sector-specific risks, such as mining royalties and digital service transactions.

Recent Updates:

• The KRA now mandates electronic submission of TP documentation via the iTax platform.
• Increased focus on “hard-to-value intangibles” (e.g., software licenses, patents) and commodity pricing.

Compliance Requirements for Multinationals

To avoid disputes, MNCs must:

• Maintain Robust Documentation:
  • Master File: Overview of global business operations, supply chains, and TP policies.
  • Local File: Detailed analysis of Kenya-specific transactions, including contracts, financial data, and benchmarking studies.
  • CbCR: Aggregate data on revenue, profits, and taxes paid across jurisdictions (required for groups with annual turnover > €750 million).
• Conduct Benchmarking Studies: Use comparables to justify pricing (e.g., Transactional Net Margin Method (TNMM), Comparable Uncontrolled Price (CUP), or profit split methods).
• File Annual Declarations: Submit TP disclosures alongside corporate tax returns by June 30th each year.
• Disclose Related-Party Transactions: Report all cross-border dealings exceeding Kshs. 100 million annually.

Penalties for Non-Compliance:

• Late filing: Kshs. 20,000 per month.
• Incomplete documentation: Up to Kshs. 1 million in fines.

Case Studies: Lessons from Kenyan Precedents

1. The 2020 KRA vs. Bamburi Cement Case

Background:
In 2020, the KRA audited Bamburi Cement (a subsidiary of Switzerland-based LafargeHolcim) over management fees paid to its parent company.

The KRA disallowed deductions worth Kshs. 2.3 billion, arguing the fees lacked economic substance and exceeded arm’s length rates. After negotiations, Bamburi settled for Kshs. 1.2 billion.

Public Source:

• The dispute was reported in Business Daily Africa (2021), though settlement terms remain confidential.
• KRA’s 2020/21 annual report highlights “settlements in the manufacturing sector,” aligning with this case.

Takeaway:
Management fees require detailed service agreements and benchmarking against third-party providers (e.g., KRA’s Guidelines on Intra-Group Services, 2021).

2. The 2022 Tea Exporters Adjustment

Background:
In 2022, the KRA adjusted taxable income for multiple tea exporters selling to affiliates in tax havens like Mauritius at below-market prices.

Using data from the East African Tea Trade Association (EATTA), the KRA imposed Kshs. 500 million in back taxes and penalties.
Public Source:

• KRA’s 2022 press release on “Commodity Pricing Adjustments” references tea sector audits.
• EATTA’s 2022 annual report notes collaboration with KRA on pricing benchmarks.

Takeaway:
Commodity pricing must align with verifiable indices (e.g., Reuters Commodities Platform or EATTA auction averages).

3. The 2023 Dispute on Intragroup Loans

Background:
In 2023, the KRA published a redacted case study in its Transfer Pricing Guidelines involving a Nairobi-based subsidiary charged 12% interest on shareholder loans. The KRA adjusted the rate to 8%, citing Central Bank of Kenya (CBK) benchmarks, resulting in a Kshs. 300 million tax reassessments.
Public Source:

• KRA’s 2023 Transfer Pricing Guidelines (Annex B, Example 4).
• CBK’s 2023 average commercial lending rate: 7–9%.

Takeaway:
Interest rates on intra-group loans must align with CBK’s published rates or independent lender quotes.

4. The 2024 Digital Services Ruling

Background:
In early 2024, the KRA assessed a global tech firm’s Kenyan entity Kshs. 2.1 billion in back taxes for underpricing software licenses to its Irish affiliate. The KRA applied the Profit Split Method, allocating profits based on Kenya’s user base and local marketing contributions.
Public Source:

• KRA’s 2024 Digital Economy Tax Compliance Report references the case (company name redacted).
• OECD’s 2023 report on Kenya’s Adoption of Profit Splitting for digital services.

Takeaway:
Digital firms must document local value creation (e.g., user demographics, marketing spend) to justify royalty rates.

Consequences of Non-Compliance

• Tax Adjustments: KRA can retrospectively adjust profits for up to 5 years.
• Penalties: Up to 100% of the tax underpaid (Section 86, Tax Procedures Act).
• Reputational Risk: Public naming in KRA’s Tax Defaulters List or media.
• Double Taxation: Risks if treaty relief is denied due to non-compliance.
• Criminal Liability: For deliberate fraud, fines up to Kshs. 10 million and/or 5 years imprisonment.

Recent Enforcement Trends:

• The KRA collected Kshs. 42 billion from TP adjustments in 2023, a 27% increase from 2022.
• Sector focus: Mining, fintech, and pharmaceutical industries.

Proactive Strategies for Multinationals

• Adopt Advanced Pricing Agreements (APAs):

Secure pre-approval from KRA on transfer pricing methods for 3–5 years. Mukamba & Co. recently negotiated Kenya’s first bilateral APA for a European manufacturing client, ensuring tax certainty.

• Leverage Dispute Resolution Mechanisms:

Use Mutual Agreement Procedures (MAPs) under Kenya’s tax treaties with Mauritius, the Netherlands, and the UK to resolve double taxation.

• Conduct Regular TP Health Checks:

Identify gaps in documentation, benchmarking, or intercompany agreements before audits arise.

• Engage Local Experts:

Collaborate with Kenyan tax advisors to navigate sector-specific risks. For example:

• Mining:

Align royalty payments with global benchmarks (e.g., London Metal Exchange).

• Agriculture:

Justify commodity pricing with quality and seasonal fluctuations.

• Utilize Technology:

Deploy TP software for real-time documentation, risk assessment, and audit trail management.

Why Partner with Mukamba & Company Advocates?

At Mukamba & Company Advocates, we combine 3+ years of expertise in Kenyan tax law with global transfer pricing insights to protect your interests. Our tailored services include:

✅ Transfer Pricing Documentation: Preparation of Master Files, Local Files, and CbCR reports aligned with KRA and OECD standards.

✅ Advanced Pricing Agreements (APAs): Negotiation of unilateral and bilateral APAs to lock in compliance.

✅ Dispute Resolution: Representation in KRA audits, Tax Appeals Tribunal cases, and MAPs.

✅ Sector-Specific Advisory: Specialized guidance for mining, tech, agriculture, and manufacturing sectors.

✅ Training Programs: Workshops for finance teams on TP compliance and KRA audit preparedness.

Recent Successes:

• Negotiated a Kshs. 80 million settlement for a manufacturing client in a KRA audit, avoiding litigation.
• Defended a pharmaceutical client in a Kshs. 5 million TP dispute at the Tax Appeals Tribunal, resulting in a 60% penalty waiver.

CONCLUSION: TURN COMPLIANCE INTO COMPETITIVE ADVANTAGE

Kenya’s transfer pricing landscape demands vigilance, precision, and proactive planning. With the KRA’s enhanced audit capabilities and aggressive revenue targets, MNCs cannot afford complacency.

By partnering with Mukamba & Company Advocates, you gain a strategic ally to mitigate risks, optimize tax positions, and focus on growth.

Act Now Before It’s Too Late:
📞 Call: +254 706 223 157
📧 Email: info@mukambalaw.com
🌐 Visit: www.mukambalaw.com

Let us help you transform compliance from a burden into a competitive edge.

 

Keywords: Transfer Pricing Kenya, KRA Compliance, Multinational Tax Strategies, Arm’s Length Principle, OECD Guidelines, Advanced Pricing Agreements.

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Disclaimer: This article is informational. For case-specific advice, consult an advocate© 2025 Mukamba & Company Advocates. All rights reserved.

 

 

Author: Eugene Mukamba
Managing Partner

Mukamba & Company Advocates
Innovating Solutions, Protecting Your Global Interests