On 28 April 2023, the Cabinet Secretary of the Kenya Ministry of Finance submitted the Finance Bill 2023 (the Bill) to Parliament, which provides the following tax measures related to transfer pricing.

The bill proposes to prohibit taxpayers from deducting withholding tax paid on payments made to non-residents if an audit adjustment has been made for that payment. The bill proposes to introduce the definition of a related party under Section 2 of the ITA. Currently, the term “connected person” is defined in the Eighth Schedule to Capital Gains and the Income Tax (Transfer Pricing) Rules 2006. Under the Finance Act, a connected person is defined as the case of two persons in which one person participates directly or indirectly in the management, control or capital of another person’s business.

The bill introduced restrictions under Section 18A Subsection 4 on intellectual property income that is taxable under a preferential tax regime. The bill proposes a formula for determining qualifying intellectual property income that is subject to taxation at a preferential rate. The Finance Act proposes that mutual administrative assistance be included within the framework of multilateral international tax compliance agreements to be effective in Kenya under the terms of those agreements. The bill also proposes the introduction of a mechanism for the enforcement and collection of tax claims by the commissioner. The commissioner raises the tax claim at the request of the competent authority of a contracting party to the international tax treaty.

The bill requires every ultimate parent company based in Kenya to file a country-by-country (CbC) report with the commissioner. All UPEs based in Kenya are required to submit a CbC report. The bill has imposed an obligation on a constituent entity (CE) of a Kenya-based multinational to file a CbC report, outlining some conditions under which a CE must file a CbC report in Kenya. The bill also proposes to clarify the income period to which the threshold applies for CBC reporting purposes. The revenue period to be considered is the previous revenue year as presented in the consolidated financial statements. The Finance Act also seeks to clarify that the threshold applies to the total consolidated group turnover.

The above provisions are expected to come into effect on 1 July 2023 upon Presidential approval.