What happened

The Kenya Revenue Authority (KRA), under the direction of Commissioner John Mbadi, announced a significant expansion of its transfer‑pricing audit programme. The move is part of a broader effort to combat tax evasion schemes that exploit cross‑border related‑party transactions. While the official statement did not disclose exact figures, it confirmed that the authority will now target a larger pool of companies, especially those with substantial import‑export activities and multinational affiliations. The expansion means that more firms will be required to submit detailed documentation on how they set prices for goods and services exchanged with overseas affiliates, and KRA will apply stricter scrutiny to ensure those prices reflect arm‑length market conditions.

Context and background

Transfer pricing has been a focal point for tax administrations worldwide because it offers a sophisticated avenue for multinational enterprises to shift profits to low‑tax jurisdictions. In Kenya, the issue gained prominence after several high‑profile cases revealed that some companies were under‑pricing imports or over‑pricing exports to minimise taxable income. Commissioner Mbadi, who took office in 2022, has repeatedly warned that the authority will not tolerate such practices. His mandate includes aligning Kenya’s tax enforcement with the OECD’s Base Erosion and Profit Shifting (BEPS) recommendations, which Kenya adopted in 2021.

The recent expansion builds on earlier steps taken by KRA. In 2021, the agency introduced a mandatory transfer‑pricing documentation requirement for large taxpayers, requiring a Master File, Local File and Country‑by‑Country Report. However, compliance was uneven, with many SMEs lacking the resources to prepare the technical reports. By broadening the audit net, KRA aims to close the compliance gap and send a clear signal that tax avoidance will be met with rigorous enforcement.

Business Daily reported that the decision follows internal risk‑assessment reviews which identified sectors such as agro‑processing, textiles and information technology as high‑risk for transfer‑pricing manipulation. The authority has also invested in training its audit teams, hiring specialists with experience in international tax law, and upgrading its data‑analytics capabilities to detect anomalies in trade invoices and customs declarations.

Compared with what is normal

Historically, KRA’s transfer‑pricing checks focused mainly on the largest corporations, typically those with annual revenues exceeding Sh10 billion. The new approach widens the threshold, bringing medium‑size enterprises into the audit scope. In practice, this means that companies previously considered low‑risk may now face inquiries similar to those once reserved for multinational giants.

• Earlier audits: primarily targeted firms with >Sh10 bn turnover.
• Current expansion: includes firms with turnover as low as Sh2 bn, especially if they engage in cross‑border related‑party sales.
• Typical audit cycle: 6‑12 months; the new programme aims to reduce this to 4‑8 months through digital tools.

Why it matters

For Kenyan SMEs, the expanded checks translate into a need for greater documentation discipline. Failure to provide satisfactory transfer‑pricing reports can result in hefty penalties, interest charges and, in severe cases, criminal prosecution. Moreover, the heightened scrutiny may affect cash flow, as disputed tax assessments are often settled before the end of the fiscal year. On the positive side, firms that proactively align their pricing policies with arm‑length standards can avoid costly adjustments and demonstrate good governance to investors and lenders.

Practical steps

• Review existing contracts with related parties and ensure that pricing methods are documented and justified using comparable market data.
• Engage a qualified tax adviser to prepare or update the Master File and Local File in line with KRA’s current requirements.
• Implement internal controls that capture and retain all relevant transaction data, including invoices, shipping documents and payment records, for at least five years.
• Train finance staff on basic transfer‑pricing concepts and the importance of consistent documentation.
• Monitor KRA communications for any new guidelines or templates that may be issued in the coming months.

Our Tax Planning & Compliance service helps businesses of transfer‑pricing documentation, ensuring that your pricing policies meet regulatory expectations while protecting your bottom line.

Talk to our team at Beavoren Ventures - info@beavorenventures.co.ke - to set up your systems correctly.

Disclaimer: This article is informational and does not constitute formal tax, audit or legal advice. For guidance specific to your circumstances, please contact Beavoren Ventures.