Introduction of Advance Pricing Agreements in Kenya's Transfer Pricing regime: Benefits, Considerations and Regulatory needs

The Finance Bill, 2024 proposes to introduce Advance Pricing Agreements in the Kenyan Transfer Pricing regime marking a significant step towards addressing challenges experienced in Kenya’s transfer pricing regime/ related party transactions. Specifically, the Finance Bill proposes that the Commissioner of ?the Domestic Taxes (the Commissioner) may enter into Advance Pricing Agreements with taxpayers who engage in related party transactions.

An Advance Pricing Agreement (APA) is an agreement between the taxpayer and the Tax Authority in relation to determination of the appropriate transfer pricing method for related party transactions. Generally, the methodology agreed upon under an APA is to be applied for a certain period of time based on fulfilment of certain terms and conditions. In Kenya the proposal is for APAs entered to between the Taxpayers and the Commissioner to be valid for a period of five (5) years.

Generally, there are three main types of APAs. These are: ?Unilateral APA which is an agreement between a Revenue Authority and a taxpayer, Bilateral APA which included two Tax/Revenue Authority and two related companies and Multi-lateral APA that exists between several countries’ Revenue Authorities and two or more related companies.

It is my view that lack of Advance Pricing Agreements framework in Kenya has created a level of uncertainty in establishment of Arms- Length Prices between MNEs therefore making it difficult for MNEs to comply with Transfer Pricing Legislation in Kenya. This has resulted in various Transfer Pricing disputes affecting many MNEs in Kenya. Additionally, the uncertainty in application of Transfer Pricing Rules coupled with various tax disputes affecting MNEs has in my view potentially had a ripple effect of making Kenya undesirable as a direct investments hub/ destination compared to other East Africa Countries (EAC) countries such as Uganda, Tanzania and Rwanda which have in place APAs.

The APA process

The Proposal under the Finance Bill, 2024 does not give the framework on the APA Process. It is expected that in the coming days, and if this Proposal for introduction of APAs is enacted into law, the Cabinet Secretary shall issue Regulations/ Guidelines on the practical aspects of implementation of the APA provisions or amend the existing Transfer Pricing Rules to accommodate APAs.

However, generally and reviewing from international best practice, the APA process can be summarized in five stages as follows:

a)?Step 1- Pre-application consultation stage- Taxpayers initiate pre-application consultations with the Revenue Authority. During this stage, the taxpayer submits an expression of interest to have discussions with the Tax Authority;

b)??Step 2- Formal application of an APA by the taxpayer. Various jurisdictions have various application formal application for example, filing of a form and submitting to the Tax Authority;

c)???Step 3- Evaluation of the request by the Tax Authority. This may also involve the Tax Authority requesting for additional information from the Taxpayer;

d)???Step 4- Negotiation between the Tax Authority and the Tax Payer on the terms of the APA; and

e)? Step 5- Drafting and execution of the APA. Once the parties have negotiated the terms of the APA, both the taxpayers and the Tax Authority signs the APA. The APA shall be applicable for the number of years specified in the APA. In many jurisdictions, during the subsistence of the APA period, taxpayer may be required (eg on annual basis) to submit with the Tax Authority a Compliance Report with APA .

What are the advantages of an APA?

There are various advantages of introducing APAs in Kenyan's Transfer Pricing regime. These include:

a)?Promoting tax certainty – this is on the basis that the taxation framework shall be certain and no unforeseen tax risks.

b)??Reduced compliance costs – this is because once an MNE negotiates and reaches an APA with the taxing authority, the MNE shall not be required to prepare TP documents on an annual basis for the period agreed upon;

c)??Reduced risk of Transfer Pricing Audits and Disputes with the Revenue Authority;

d)??Reduction of double taxation risks; and

e)??Improved relationship between taxpayers and the Tax/Revenue Authority as they provide for win-win situations for all parties involved.

Considerations and Regulatory for implementing APAs in Kenya

While the benefits are clear, several considerations need to be addressed to ensure the successful implementation of APAs in Kenya. These include:

i)?Comprehensive Legislation: There is need for establishing a detailed legislative framework to define the scope, application, and procedural aspects of APAs. This includes eligibility criteria, the process for application, and the binding nature of agreements.

ii)Capacity Building: Both the KRA and taxpayers need adequate training and resources to manage and implement APAs effectively. This involves building expertise in transfer pricing and international taxation within the tax authority.

iii)?Transparency and Fairness: The APA process should be transparent, with clear guidelines on the documentation and information required. Additionally, ensuring fairness and impartiality in the application process is crucial to gaining taxpayer confidence.

?iv)?Dispute Resolution Mechanisms: Establishing robust mechanisms for resolving disputes that may arise during the APA process is essential. This includes clear timelines and procedures for appeals and reviews.

v)??Alignment with International Standards: Kenya should align its APA framework with international best practices and guidelines provided by organizations such as the OECD to ensure consistency and credibility in the global tax landscape.

Conclusion

It is my view that the proposal to introduce Advance Pricing Agreements in Kenya represents a forward-thinking approach to enhancing the country's International Taxation Framework. However, to realize these benefits, Kenya must develop a comprehensive regulatory framework, invest in capacity building, and ensure transparency and fairness in the APA process. This way, Kenya can establish a successful APA program that fosters a more predictable and investor-friendly tax environment, ultimately contributing to the country's economic growth and development.

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