Transfer Pricing Disputes in Kenya: Advance Pricing Agreements the Way Forward?

Abstract: Kenya, like the rest of the world, in an effort to protect its tax base, has enacted a transfer pricing (TP) legislation requiring, among other things, that inter-company transactions be conducted at arm’s length. However, due to the very nature of TP transactions, the determination of the correct arm’s length price or profit margin has remained a major challenge, not only for the taxpayers, but for the tax authority as well. Given the divergent interests of the parties concerning the tax consequences of a transaction, this uncertainty escalates the potential of disputes between tax authorities and taxpayers. Advance Pricing Agreements (APAs) provides a mechanism through which disputes may be avoided ex ante by parties agreeing in advance on the methodology to be applied in determining the arm’s length price or profit margin, thereby offering the much needed certainty in transfer pricing issues. However, Kenya, and indeed the rest of Africa are yet to embrace APAs despite the existence of evidence of its success from other jurisdictions. This work explores the possibility of adoption of APAs within Kenya’s tax and legal system to help in the resolution of TP disputes, an issue which is currently one of the major international tax challenges facing the country. The study commences by briefly outlining the transfer pricing problem and the various TP dispute resolution mechanisms currently available. The study then examines the OECD recommendations on APAs and how those recommendations have been implemented at the domestic level by a selected OECD and non-OECD members. Based on the countries’ experience, the study then critically assesses the possibility of adoption of the programme in Kenya by focusing mainly on the legal considerations that the implementation of APAs would raise. A conclusion is then reached that while there may be some criticisms against the programme, the advantages offered by APAs outweigh such disadvantages. Consequently, a recommendation is made for the Kenya Revenue Authority (KRA) to consider implementing the programme, by learning from the experiences of the early implementers such as the United States (US), but taking precaution to adapt such experiences to fit Kenya’s unique socio-economic and legal circumstances.