The Organisation Of Economic Cooperation And Development (OECD) Transfer Pricing Guidelines: An Evaluation Of Their Effectiveness In The Kenya’s Tax Regime
The basic law governing transfer pricing in Kenya is contained in section 18(3) of the Income Tax CAP. 470. It is based on the arms length principle. This section is expressed in general terms and therefore difficulty to apply. To remedy the defect, the Income tax (Transfer Pricing) rules of 2006 were issued. The rules set out methods to be employed in arriving at an arm‘s length price or margin for transactions between a Kenyan party and a related party in another tax jurisdiction. The rules borrow heavily from the OECD Transfer Pricing guidelines of 1995. These guidelines are comprehensive and are widely used by both OECD and non OECD members. Specifically, Kenya applies the guidelines as soft law to augment its transfer pricing rules. The OECD Transfer Pricing guidelines were crafted for developed economies experiencing a different set of circumstances from those of Kenya. As a taxation tool, the guidelines have been applied with a lot of challenges, sometimes resulting to unwarranted loss of revenue. It is against this backdrop that it was found necessary to examine the extent to which OECD Transfer Pricing guidelines are applicable in the Kenya‘s tax legal regime. To achieve this, this study identifies parts of the Guidelines that are difficult to apply, and the useful parts not yet incorporated in the Kenya‘s tax legislation. Appropriate recommendations are then made to the relevant authorities for a possible legislation change. The methodology applied in the study included the use of secondary data gathering and to a lesser extent structured oral interviews. The findings of the study are that although the OECD Transfer pricing guidelines are globally accepted standards for transfer pricing, certain aspects of it cannot be applied in Kenya due to its economy‘s unique circumstances. This has been found to be similar to v experiences in other countries like India and Brazil where the operation of the arms length principle has been approached differently. The opposition to the OECD Transfer Pricing guidelines appears to be growing day by day which has led the OECD to acknowledge that there are indeed challenges that requires to be addressed to make the guidelines more practical. To ensure for certainty, simplicity and relevance of the guidelines, Kenya may have to look for an alternative to the arms length principle. Top in the list is the establishment of a local data base for margins and prices, which should be applied before any other source of comparables is considered. In a situation with a range of results, the median should be the comparable price or margin. A specific penalty regime should be put in place to cover all aspects of transfer pricing especially on non submission of transfer pricing records. Training on international tax issues should be prioritized for KRA officer, the tax tribunal, the local committee and the Judiciary so as to give the Kenya‘s tax regime a broader, flexible and effective approach in tackling transfer pricing problems.