Transfer pricing refers to the prices charged between related parties — a parent and subsidiary, two companies with common ownership, or a company and its director's other businesses. KRA's transfer pricing regulations require that all such transactions be conducted at "arm's length" — as if between unrelated parties.
Why KRA Cares
Without arm's length pricing, profits can be shifted to lower-tax jurisdictions or loss-making entities to reduce overall tax. For example, a Kenyan subsidiary paying inflated management fees to a Mauritius parent reduces its taxable income in Kenya while accumulating profits offshore at a lower tax rate.
Documentation Requirements
Companies with related-party transactions above KSh 50 million must maintain a transfer pricing study — a formal document benchmarking their prices against comparable uncontrolled transactions. KRA requires this documentation to be available upon request.
Common Related-Party Transactions Reviewed by KRA
- Management fees from parent to subsidiary
- Royalties for intellectual property use
- Intra-group loans and interest
- Services rendered between related entities
- Goods sold or purchased between group companies
Penalties
Failure to maintain transfer pricing documentation can result in a tax adjustment and 25% penalty on under-declared income. KRA has become increasingly sophisticated in this area since 2020.
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