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Why transfer pricing is still a wake-up call for multinationals

FINANCIAL STANDARD
By - Esther Wahome and Evelyn Muturi | June 11th 2013

By  Esther Wahome   and Evelyn Muturi

The transfer pricing provisions in the Law aims at ensuring local entities that are part of a multinational group (MNE) pay their “fair” share of taxes.

One of the main considerations for multinationals when setting up operations internationally, is how best to structure the group for purposes of tax planning.

The tax planning mechanisms have now become a key focus area for the Kenya Revenue Authority (KRA) when carrying out transfer pricing audits.

 The use of holding companies in low tax Jurisdictions or tax havens raises a lot of suspicion.  KRA is now paying more attention to the pricing of inter-company transactions between members of MNE’s.  The rise in the number of transfer pricing audits and assessments signals KRA has become aggressive in auditing transfer pricing structures.

It is now more vigilant in ensuring that intra-group transactions meet the arm’s length standards as set out in Kenyan transfer pricing rules.

The taxman recently expanded its reach by increasing expanding transfer pricing task force through the creation of a transfer pricing team at the Medium Tax payers Office to handle this role.

Our recent experience with KRA transfer pricing audits indicates that continuous losses by MNEs, a group companies located in tax havens will always be challenged by the taxman.  It is evident that persistent losses present a high transfer pricing risk to tax payers in Kenya. It will almost always lead to transfer pricing adjustments, particularly where it can be demonstrated that comparable independent enterprises are profitable. 

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Post poll period

 The sad reality is that even when there are other factors leading to the losses, such as the slump in business experienced by many sectors during the post 2007 election period, KRA seems convinced thatsuch losses arose out of transactions related to abuse of transfer pricing.

The lack of Advance Pricing Agreements provisions in the Kenyan tax law does not help matters. This means that there is no legal basis for taxpayers to negotiate and agree in advance with the KRA on transfer pricing arrangements, which would provide some certainty.  The dispute resolution mechanism is also wanting. In particular, transfer-pricing disputes are canvassed at the Local Committee made up of persons appointed by the Cabinet Secretary for the National Treasury.

 Whereas such a body is useful in arbitrating disputes, the technical nature of most of the disputes that arise from transfer pricing, and now increasingly other income tax disputes, calls for a rethink in terms of the composition of the Committee.

 One would hope that the Committee would be made up of mostly tax and legal experts who can meaningfully digest the technical arguments and deliver rulings that can withstand scrutiny.  The currently volatile and active transfer-pricing environment in Kenya makes it necessary for taxpayers to review the pricing of intercompany transactions.

 Tax payers should keep in mind the magnitude of transfer pricing adjustments that result from KRA audits and the time and cost involved in resolving transfer-pricing audit issues.

This includes arbitration processes.  Multinationals will be required to increase their efforts in this area. They shoul also  engage with their tax advisors in order to avoid any nasty surprises from revenue authorities.

Esther is a tax consultant with Deloitte while Evelyn is a tax manager in the same firm. The views expressed in this article do not necessarily represent those of Deloitte


 

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