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Kenya: Transfer pricing update


published on 23 March 2021 | reading time approx. 2 minutes


Transfer pricing refers to the pricing of goods, services and intangibles (in the case of royalties) between related parties located in different countries. Transactions between related parties are to be carried out at an “arm’s length” basis.



Abuse of transfer pricing may be unlawful and occurs when related entities manipulate the pricing of transactions between themselves resulting in trans­actions that are not carried out at arm's length. Transfer pricing is an important area for revenue authorities as it is estimated that about 60 per cent of international trade happens within multinational entities.


In the past few years, there has been increased attention on activities of multinational enterprises (MNEs) in Kenya and the East Africa region with a particular focus on pricing arrangements of trans­actions between related parties. The Kenya Revenue Authority (KRA) has also been aggressive in pursuing transfer pricing malpractices and has issued huge assessments against non-compliant taxpayers.


In Kenya, Transfer Pricing rules became effective from 1st July 2006 and borrowed significantly from the Organization for Economic Co-operation and Development (OECD) Transfer Pricing Guide­lines.


Under Section 18(3) of the Income Tax Act (ITA), transactions between a resident entity and it related non-resident should be at arm's length.


The Income Tax (Transfer Pricing) Rules, 2006 (the Rules) apply to:

  • Transactions between associated enterprises within a multinational company, where one enterprise is located in, and is subject to tax in, Kenya, and the other is located outside Kenya; and
  • Transactions between a permanent establishment and its head office or other related branches, in which case the permanent establishment shall be treated as a distinct and separate enterprise from its head office and related branches.


These rules form the basis for the determination of the arm’s length price in transactions between related parties. They entitle the Commissioner to adjust transaction prices where he is of the view that the related parties did not transact at arm’s length.


The following transactions are subject to the transfer pricing rules:

  • the purchase or sale of goods and services;
  • the sale, purchase or lease of tangible assets;
  • the transfer, sale, purchase or use of intangible assets;
  • the provision of service;
  • the lending or borrowing of money; and
  • any other transactions which may affect the profit or loss of the enterprise involved.



The impact of Coronavirus (Covid-19) continues to be felt not only in Kenya but also across the globe. Businesses continue to manage issues that span from keeping their employees and customers to cash-flow and liquidity among others.


From a transfer pricing perspective, the crisis has had an impact on compliance with the arm's length principle as studies regularly use historical data and apply the results for prior years for benchmarking purposes.

This therefore means that there is a need to adjust benchmarking studies for 2020 since they cannot be compared to prior year’s  performance.


The adjustments to be incorporated need to take into account impacts of Covid-19 which include working from home arrangements, productivity, disruptive supply chain resulting from border closures, lock downs affecting movement of goods and employees etc.

Quantifying these effects from a from a transfer pricing perspective is not easy, however these changes need to be articulated and appropriately documented to ensure that the companies can continue to justify their transfer pricing positions.


It also remains to be seen whether revenue authorities will still expect companies to report similar profits or whether they will be open to different approaches that can be used to make adjustments for Covid-19. 

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