A Case for Introduction of Advance Pricing Agreements Provisions in Kenya: Creating Certainty in Transfer Pricing Law
Abstract
Transfer pricing has grown into a global issue because of the increase in international transactions
which generate revenue for MNEs, and the realization by these businesses that through
manipulation of the tax rules in different jurisdictions, they can report higher profits than their
competitors.
This study puts forward a case for the introduction of Advance Pricing Agreements (APAs) in
Kenya to create certainty in the process of determining transfer prices in transactions between
resident persons and multinational enterprises (MNEs). This proposition is based on the argument
that the absence of APAs creates uncertainty in establishing the arm’s length price (ALP) for
international transactions carried out by the MNE. Where an MNE experiences challenges in
establishing the ALP for its transactions, this is likely to make it difficult for the MNEs to develop
its TP policy for Kenya. As a result, the MNE would be likely to consider that Kenya is an unfavourable
tax environment for its global transactions.
This study argues that taxpayers and the tax revenue authorities face challenges in securing
compliance with the current Transfer Pricing (TP) Rules. Through the use of APAs, Kenya’s tax
revenue authority will find it easier to ensure compliance with the TP Rules as the ALP will be pre
agreed. This will ultimately create certainty for investors due to the predictability of the transfer
prices. To achieve this, this study proposes incorporation of provisions on APAs in the existing
TP Rules. In addition, it recommends the establishment of a pilot APA program to jumpstart efforts
in efficient TP regulation.
The study is influenced by the guidelines provided by the United Nations which offer guidance on
the policy and administrative aspects of applying transfer pricing. Through administrative activity,
tax revenue authorities, particularly KRA, can reduce TP disputes. Due to their administrative
nature, this study proposes APAs as a possible solution in line with the United Nations guidelines.
Publisher
University of Nairobi