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In a recently published Public Notice (the Notice), the Kenya Revenue Authority (KRA) has enhanced the Income Tax Company Return (the Return) on the iTax platform to provide for the declaration of related party transactions by persons with related parties and whose ascertainment of gains or profits from a business is subject to the provisions of Section 18 or Section 18A of the Income Tax Act Cap 470 Laws of Kenya (the ITA).
The Notice requires that the taxpayer answers affirmatively to the question in the basic information sheet of the Return and indicate whether they have related parties outside Kenya or controlled transactions. After that, the taxpayer is expected to provide the relevant details of these related party transactions under the designated sheet “B2_Related_party_transaction” in the Return.
A controlled transaction is defined by the ITA to mean ‘a transaction which is monitored to ensure payment of an arm’s length price for goods or services.’ With the enactment of Section 18A of the ITA, transactions with resident and non-resident related parties based in preferential regimes are therefore also covered and must be disclosed under the enhanced disclosure requirement.
Impact of the Enhanced Disclosure Requirements
As a result of the enhanced disclosure requirements, the KRA will now have greater visibility on related party transactions and this is aimed at enhancing transparency and accountability in these transactions, which will subsequently assist in risk assessment and selection of cases for tax audits.
With the implementation of these enhanced disclosure requirements, we expect to see the KRA step up its compliance checks and an increase in requests for transfer pricing documentation where necessary to support the application of arm’s length pricing for controlled transactions. Therefore, it is crucial for businesses to maintain current and updated transfer pricing policies and records of their related party transactions, especially those involving non-resident entities and those dealing with persons in preferential regimes which include Export Processing Zones and Special Economic Zones.
1. Robert Mabwa – Associate
2. Abdullahi Ali – Associate
3. Caleb Weisiko – Trainee Lawyer