In a bid to curb profit shifting, Kenya is increasing its transfer pricing documentation requirements. The recently published Kenya Finance Bill seeks to have the ultimate parent entity of a multinational enterprise group or a constituent entity of a multinational enterprise group (MNE’s), which is a tax resident in Kenya, file a country-by-country report.
This proposed new requirement will apply to MNE’s whose group annual gross turnover (including extraordinary and investment income) is above $814 million (US dollars), and it becomes effective on January 1, 2022.
If enacted into law, multinational enterprise groups operating in Kenya will be required to notify the Kenya tax authorities about their group structures—and who is responsible for filing—by the group’s last day of the reporting financial year.
Information on group structure would include a disclosure on whether an MNE is the ultimate parent entity of the group, whether it is a surrogate patent entity, or if it is the nominated entity for purposes of filing of country-by-country reports in Kenya.
If the MNE is neither of the above, the identity of the entity required to file country-by-country reports in Kenya would be required to be notified to the revenue authority by the MNE.
The country-by-country report shall be filed by the ultimate parent entities within a period of 12 months from the last day of the financial year of the group. Additionally, an ultimate parent entity of a multinational enterprise group or a constituent entity shall be required to file a master file and local file with the Kenya tax authorities within six months after the last day of the financial year of the multinational enterprise group.
In the event that a multinational enterprise group has more than one constituent entity in Kenya, the group shall appoint one of the entities as a surrogate parent entity for purposes of filing the country-by-country report in Kenya.
The bill proposes that a country-by-country report to be filed with the Kenya tax agency shall contain information on each constituent entity, the identity, jurisdiction of tax residence, and the main business activity.
The report should also contain information on the group’s aggregate revenue, profit or losses before tax, income taxes paid, income tax accrued, states capital, accumulated earnings, number of employees, tangible assets, cash and cash equivalents and any other information as required by the Kenya tax agency.
Further, the bill proposes that the master file, which is to be filed with the Kenya tax agency, shall contain information on the group overview and growth engines, a description of the supply chain of key products and services, the research and development policy of the group, a description of the value creation by each constituent entity, the group’s assets and the intercompany agreements, the countries in which intangible assets are registered and the consideration paid as part of any transfer.
The master file should also contain information on the financing activities of the group, the consolidated financial statements of the group, any tax rulings made in relation to the group, and any other information that the Kenya tax agency may require.
The local file shall contain information on the detailed activities and all information in relation to the resident constituent entity in Kenya. Such local entity information may include details on management structure, the resident constituent entity’s business strategies including structuring, description of the controlled transactions and the business and competitive environment.
The reporting requirements are a furtherance to the country-by-country reporting requirements for ultimate parent entities of multinational enterprises with tax residence in Kenya. They were introduced by the Finance Act and the signing of the Convention on Mutual Administrative Assistance in Tax Matters.
The reporting requirements are in line with the Organization for Economic Co-operation and Development’s Guidelines with the adoption of the three-tier documentation approach and consistent with the base erosion profit shifting (BEPS) Action 13.
The country-by-country reporting requirements are likely to impose additional compliance burdens on taxpayers in respect of related-party transactions. Ultimate parent entities of multinational enterprises in Kenya should therefore review their current transfer pricing documentation and compliance processes in line with the new regulations to ensure they remain compliant with the new requirements going forward.
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