MNEs Tax Compliance Through Development of Transfer Pricing Policy


Kenya through its proposed Finance bill 2021, introduced documentation guidelines for Multinational Enterprises (MNEs) operating locally through their subsidiaries. This comes at a time when globally jurisdiction members under Organization for Economic Cooperation and Development (OECD) are racing to implement Inclusive framework on BEPS (Base Erosion and Profit Shifting) to combat illicit financial flows, tax evasion and avoidance.

It is against this backdrop that MNEs should race to implement and document the transfer pricing policy that guides their transactions between the related parties as per the arm’s length principle.

To do this, it is important for MNEs to understand the domestic rules set forth by the Kenya government and relevant guidelines under OECD inclusive framework on BEPS. These guidelines under OECD, dubbed BEPS 15 Actions. Action 7-15 guides the transfer pricing approach by member jurisdictions touching on but not limited to;

  • Permanent establishment definition
  • Transfer pricing documentation
  • Dispute resolutions
  • Aggressive tax planning and Multilateral instrument.

In light of the development globally, Kenyan government adopted the BEPS Actions by introducing legislations on transfer pricing reporting by MNEs and necessary documentations needed upon request by the commissioner.

It is therefore critical that MNEs document the transfer pricing policy to include the following files on request by the commissioner;

  • Master file containing general information about the MNE relevant to all MNE members,
  • Local file referring specifically to material transactions of the MNE members resident in the local jurisdiction and setting out the taxpayer’s transfer pricing methodology for such material transactions; and;
  • Country-by-Country report containing certain information relating to the global allocation among taxing jurisdictions of the MNE’s income and taxes paid, together with certain general indicators of the location of economic activity within the MNE.

The MNEs are obliged as per Income tax law cap 470 section 9(2) to include up and above the reporting files the following documentation relating to the following:

  • The selection of the transfer pricing method and the reasons for the selection. The methods include;
    • Comparable Uncontrolled Price: in which the transfer price in a controlled transaction is compared with the prices in an uncontrolled transaction and accurate adjustments made to eliminate material price differences.
    • Resale Price Method: in which the transfer price of the produce is compared with the resale price at which the product is sold to an independent enterprise: Provided that in the application of this method the resale price shall be
      reduced by the resale price margin (the profit margin indicated by the
    • Cost plus method: in which costs are assessed using the costs incurred
      by the supplier of a product in a controlled transaction, with a mark-up
      added to make an appropriate profit in light of the functions performed,
      the assets used and risks assumed by the supplier.
    • Transactional Net Margin Method (TNMM): in which the net profit margin attained by a multinational enterprise in a controlled transaction is compared to the net profit margin that would have been earned in comparable transactions
      by an independent enterprise.
    • Profit Split Method: in which the profits earned in very closely interrelated
      controlled transactions are split among the related enterprises depending on
      the functions performed by each enterprise in relation to the transaction,
      and compared with a profit split among independent enterprises in a joint
  • The application of the method, including the calculations made and price adjustment factors considered;
  • The global organization structure of the enterprise;
  • The details of the transaction under consideration;
  • The assumptions, strategies, and policies applied in selecting the method; and
  • Such other background information as may be necessary regarding the transaction.


Way Forward

It is prudent for MNEs when documenting the transfer pricing policy to conduct an in-depth analysis of the business by defining the following areas:

  • Define key characteristics of the industry including competitive landscape, overall profitability, main factors for pricing, importance of Intellectual Property and their unique selling propositions.
  • Mapping and categorizing cross-border transactions among the related parties that are more relevant within the group.
  •  The hierarchical relationship between the group companies
  • Quantifying the volume of intragroup transactions
  • Describing the pricing mechanism utilized in intragroup transactions; that is, which transfer pricing methods are applied
  • Determine the intangibles being transferred between related parties in the context of business restructuring
  • Indicating the underlying reasons for continuous losses if any
  • Defining intangibles that are crucial for the success of the business and determining the related entity in charge of DEMPE (Development, Enhancement, Maintenance and Exploitation)

Author: Eddie Opiyo