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.