Review of The Draft Income Tax (Transfer Pricing) Rules, 2023
On 4th September 2023, the Cabinet Secretary (Treasury and Economic Planning) through the Commissioner General (KRA) published the Draft Income Tax (Transfer Pricing) Rules, 2023 for public comment. These rules are expected to replace the Income Tax (Transfer Pricing) Rules 2006 which are currently in force. The Draft Rules (2023) encompass the various statutory amendments to the Income Tax Act and are aimed at keeping in line with these changes. Notably, they are geared towards alignment to the Organization for Economic Co-operation and Development Transfer Pricing Guidelines (OECD TP Guidelines). This Article seeks to highlight the critical changes proposed by the Draft Rules (2023) as against the 2006 Rules and their projected impact.
The Draft Rules (2023) have inter-alia widened the scope of transactions subject to transfer pricing rules, detailed the categories of information that the Commissioner can request from taxpayers, introduced guidance on the application of the pricing methods for transactions involving commodities as well as aligned the penalties for non-compliance with recent legislation changes as further discussed below in brief.
Perhaps the most notable change proposed by the Draft Rules (2023) is the widening of the scope of transactions subject to Transfer Pricing Rules. The 2006 Rules listed a narrow application of the Transfer Pricing Rules that the Draft Rules (2023) now seeks to enhance to cover other transactions including insurance and re-insurance services, business restructuring or re-organization, cost contribution arrangements as well as transactions involving derivatives.
Further, the Draft Rules (2023) have widened the scope beyond that provided by the 2006 Rules in relation to information that the Commissioner General may request from a taxpayer. In doing so, the Draft Rules (2023) have highlighted categories of specific information that the Commissioner may request, and this includes inter-alia the description of controlled transactions including contracts/agreements thereof, list and description of selected comparable uncontrolled transactions, Amount of Payment and receipts, Details of the relationship of each entity with the taxpayer and explanation of the choosing of the most appropriate transfer pricing by the taxpayer. Such information is crucial in enhancing transparency and accountability.
On transfer pricing methods, the Draft Rules (2023), in relation to the comparable uncontrolled price (CUP) method and on such other method as may be prescribed by the Commissioner from time to time, provide that in relation to the export or import of commodities, the arm’s length price would be the prevailing price on an international or domestic commodity exchange market, a recognized and transparent price reporting or statistical agencies, governmental price-setting agencies, or from any other index that is used as a reference by unrelated persons to determine prices of commodities in transactions between them i.e. publicly quoted price. Commodities have, in the Draft Rules (2023) been defined to include agricultural produce, fisheries products, solid or liquid or gas minerals, hydrocarbons and derivatives thereof, other products or natural minerals or mineraloids obtained from the land or waters, and, in general, good where publicly quoted price exists. Notably, under the Draft Rules (2023), the Commissioner is authorized to issue guidelines regarding conditions and procedures guiding the application of the transfer-pricing methods above.
In relation to penalties for non-compliance, the Draft Rules (2023) have referred to application of penalties for non-compliance as set out in the Tax Procedures Act (2015). Non-compliance in this instance relates to inter-alia fraud, underpayment of tax and failure by taxpayers to make returns. This is in line with the repealing of penalties for non-compliance provisions of the Income Tax that the 2006 Rules relied on.
In a nutshell, the Draft Rules (2023) presents an array of changes to the Transfer Pricing regime in Kenya, most of which of are geared towards incorporating country-by-country (CbBCR) reporting as well as other changes to the Income Tax Act section on related-party transactions occasioned by the Finance Act (2022) on Multinational Entities including transfer pricing documentation requirements for MNEs in Kenya. Such changes calls for more compliance requirements for MNEs in Kenya for instance in relation to reporting and documentation. Further, the Draft Rules (2023) being modelled in line with OECD guidelines, the Draft Rules (2023) continue to reinforce Kenya’s global standing as regards Transfer Pricing.