Transfer Pricing in Kenya: KRA Rules, Compliance and Documentation Requirements

Transfer pricing in Kenya is governed by section 18 of the Income Tax Act (Cap. 470) and the Income Tax (Transfer Pricing) Rules, 2026 (Legal Notice 186 of 2026), which were made on 12 August 2026 and revoke the Income Tax (Transfer Pricing) Rules of 2006. Anyone still working from the 2006 Rules, or from guides that describe them, needs to update. This guide covers what the new Rules require, the documentation duties in the Act, advance pricing agreements, country-by-country reporting and the interest limitation that now applies to related-party loans.

The Legal Framework for Transfer Pricing in Kenya

The 2026 Rules are made under section 18(8) of the Income Tax Act, read with section 130. Rule 3 states their object as providing guidelines for determining arm’s length prices for transactions between related persons, and rule 4 applies them to transactions contemplated by sections 18, 18A, 18B, 18C, 18D, 18E and 18F of the Act. Rule 2 defines the arm’s length price as the price payable in a transaction between independent persons, and a controlled transaction as a transaction between related persons.

Transactions Covered

Rule 5 lists the transactions subject to adjustment. They include the purchase, sale, transfer or use of tangible and intangible property, the provision of services, financing transactions of any kind (long or short term borrowing, lending or guarantees, marketable securities, advance or deferred payments and receivables), insurance and reinsurance, business restructurings, cost distribution arrangements, transactions in derivatives, and any other transaction that may affect the profit or loss of the person involved. The list is broad, so intra-group management fees, royalties, loans and guarantees all sit inside it.

Choosing a Transfer Pricing Method

Rule 6(1) requires a person to choose the most appropriate of the following methods to determine an arm’s length price:

• the comparable uncontrolled price method;
• the resale price method;
• the cost-plus method;
• the profit split method;
• the transactional net margin method; and
• any other method the Commissioner prescribes where none of the above can determine the price.

Rule 7 requires the person to apply the method most appropriate to its enterprise, having regard to the nature of the transaction, the class of related persons, and the functions performed. There is a special rule for commodities. Where prices can be obtained from an international or domestic commodity exchange, a recognised price reporting agency or a government price-setting agency, the publicly quoted price at the shipping date is used for computing taxable income, determined as the average of the prices fifteen days before and after the shipping date, unless the taxpayer provides evidence that adjustments are appropriate. Under rule 6(2), if the price agreed with an unrelated person is higher (for exports) or lower (for imports) than the quoted price, the agreed price is used.

Documentation and Information Requests

Under rule 9, a person who asserts that it applied arm’s length pricing must develop an appropriate transfer pricing policy, determine the arm’s length price in accordance with the Rules, and make documentation evidencing its analysis available to the Commissioner on request. Rule 8 then sets out what the Commissioner may call for, including:

• the selection of the method and the reasons, the calculations, and the global organisation structure;
• a detailed description of each category of controlled transaction, with contracts and the parties involved;
• a functional analysis of the functions performed, risks assumed and assets used;
• a comparability analysis, including the search process, data sources, selection criteria and the reasons comparables were rejected;
• audited financial statements and segment accounts; and
• any advance pricing arrangements applying in other countries.

Rule 8(6) requires the books and documents to be prepared in, or translated into, English at the time the transfer price is arrived at. Keep the file current each year, because the request can come at any time.

Master File, Local File and Country-by-Country Reporting

Section 18D of the Act deals with these filings. A Kenya-resident ultimate parent entity must file a country-by-country report, and a Kenya-resident constituent entity must file one in specified cases, such as where the ultimate parent is not obliged to file in its own jurisdiction. These obligations apply to multinational enterprise groups with consolidated turnover of at least KES 95 billion in the preceding financial year (section 18D(1B)). The report is due not later than twelve months after the last day of the reporting financial year. The master file and local file are due not later than six months after that date (section 18D(4)). Failure to comply with sections 18C and 18D is an offence subject to the penalties in the Tax Procedures Act (section 18E).

Advance Pricing Agreements

Section 18G allows the Commissioner to enter into an advance pricing agreement with a person undertaking a transaction contemplated under section 18(3) or 18A. The arm’s length amount is then determined in accordance with the agreement, which is valid for a period not exceeding five consecutive years. If the Commissioner determines that the agreement was obtained through misrepresentation of facts, it is void and the Commissioner must give written notice.

Penalties and Additional Tax

Rule 10 applies the Tax Procedures Act provisions on fraud, failure to furnish returns and underpayment of tax to transfer pricing. Under rule 11, any tax due and unpaid in a transfer pricing arrangement is deemed additional tax for the purposes of section 38 of the Tax Procedures Act. A transfer pricing adjustment therefore carries both the tax and the statutory additions, so the cost of getting the price wrong is larger than the tax difference alone.

Interest Limitation on Related-Party Loans

Section 16 of the Income Tax Act disallows a deduction for gross interest paid or payable to a non-resident in excess of thirty per cent of the borrower’s earnings before interest, taxes, depreciation and amortisation in a financial year, with exempt income excluded from the calculation. Guides that describe a three-to-one debt-to-equity ratio are out of date. A loan from a foreign parent must satisfy two separate tests: the interest rate must be arm’s length, and total interest must fall within the thirty per cent limit.

Intercompany Service Charges

Management and technical service fees fall within rule 5 and need evidence that the services were rendered, that the charge is at arm’s length and that the Kenyan company benefited. Keep contracts, invoices, reports and meeting records that show the service was delivered and what it cost the provider.