Kenya Enacts Tax-Avoidance Law to Deal With Transfer Pricing

Kenya enacted a new law targeting units of foreign companies that escape remitting most of their domestic taxes by allocating income to tax havens while attributing expenses to the East African nation, a practice known as transfer pricing.

The Tax Procedures Act gives the Kenya Revenue Authority powers to investigate pricing arrangements between local units of multinationals with their parent companies and overturn any that it deems to have been structured with the intention of avoiding tax.

“If the commissioner has applied a tax-avoidance provision in assessing a taxpayer, the taxpayer is liable for a tax-avoidance penalty equal to double the amount of the tax that would have been avoided but for the application of the tax-avoidance provision,” the law published in the official Kenya Gazette reads.

The new law will buttress the government’s efforts to increase tax collections as it faces a widening fiscal deficit. The KRA missed its half-year revenue-collection targets by 47.6 billion shillings ($467 million), according to a draft budget policy statement by the Treasury.

The KRA said it is also working with authorities in Uganda, Rwanda and Tanzania to curb illicit trade in taxable goods as part of efforts to cut revenue leakages and tax evasion within the region.

The five-member East Africa Community bloc is working toward a fully functional Single Customs Territory that will ease goods clearance, increase revenue and reduce protectionist tendencies, KRA Commissioner-General John Njiraini said in an e-mailed statement. The cost of clearing cargo at Kenya’s Mombasa port -- the main entry point for most merchandise to the region -- has fallen 30 percent since August 2015 when the region adopted the single customs regime, according to the statement.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE