Transfer Pricing in East Africa: Getting Your Documentation Right
Related party transactions attract close attention from revenue authorities. Sound documentation is your first line of defence.
By Mdawida LLP Tax Team
Key takeaways
- Price related party dealings as if the parties were independent.
- Master File, Local File, and Country by Country reporting form the model.
- Documentation must match what actually happened in the ledger.
Any business that trades with a related party across a border needs to price those dealings as if they were between independent parties. In Kenya, this arm's length principle is anchored in Section 18(3) of the Income Tax Act and supported by transfer pricing rules that continue to move closer to global standards.
The three tier documentation model
Following the international framework known as BEPS Action 13, large groups are expected to hold a Master File describing the group as a whole, a Local File covering the Kenyan entity's specific transactions, and, above a size threshold, a Country by Country report. Kenya introduced the rules for these filings through earlier finance legislation.
For a mid sized group, the Local File is usually the document that decides an audit. It should set out the related party transactions, the functions and risks of each party, the pricing method chosen, and a benchmarking analysis that supports the result.
Common weaknesses we see
The most frequent problem is documentation prepared after the fact, describing a policy the business never actually followed. A file that does not match the ledger invites challenge rather than closing it.
The second is management fees and intra group services with no evidence that a real service was rendered or that an independent party would have paid for it. These are among the first items a reviewer tests.
Getting ahead of both means writing your policy before the year, pricing transactions to it during the year, and refreshing the benchmarking before you file. Documentation is cheaper than a dispute.
This article is general guidance, not specific professional advice. Tax law and reporting standards change, and your situation is unique. Speak with us before acting on anything here.
