Understanding Transfer Pricing Documentation Requirements for MNEs

Tax regulations are constantly evolving, especially with novel concepts like transfer pricing, both at local and global levels. In recent years, there has been a concerted effort to reduce tax leakages in developing countries by curbing tax evasion strategies employed by multinational enterprises (MNEs).

OECD and BEPS Action Plans

In 2015, the Organization for Economic Cooperation and Development (OECD) introduced 15 action plans aimed at addressing Base Erosion and Profit Shifting (BEPS), a strategy where Multination Enterprises (MNEs) shift profits from high-tax countries to low-tax jurisdictions to minimize their tax liability.

The BEPS initiative focuses on closing loopholes that allow this practice. One of the key action plans, Action 13: Transfer Pricing Documentation and Country-by-Country Reporting, emphasizes the importance of comprehensive transfer pricing documentation to ensure transparency in global tax reporting.

Objectives of Transfer Pricing Documentation

BEPS Action 13 outlines three primary objectives for maintaining transfer pricing documentation:

Compliance with transfer pricing rules: Taxpayers must ensure they meet transfer pricing requirements when setting prices and conditions for transactions between related parties, and report the corresponding income accurately in their tax returns.

Transfer pricing risk assessment: Tax authorities need sufficient information to assess the risk of improper transfer pricing practices and identify potential tax avoidance strategies.

Effective audits: Authorities must have access to detailed information to conduct thorough audits of a taxpayer’s transfer pricing practices, ensuring compliance with tax laws.

Three-Tiered Documentation Approach

To achieve these objectives, the OECD recommends a three-tiered documentation approach for transfer pricing, which helps tax authorities gain a more comprehensive understanding of an MNE’s activities. This approach includes:

Local File: This document provides details on material transactions of the local taxpayer, focusing on their specific operations and transfer pricing policies.

Master File: A standardized document that offers information relevant to all MNE group members, providing a broader view of the group’s global activities.

Country-by-Country Report (CbCR): This report contains key data on the global allocation of income, taxes paid, and economic activity across the MNE group, helping authorities identify potential profit-shifting practices.

This approach enables tax administrations to conduct more efficient and informed risk assessments of MNEs' transfer pricing practices.

Compliance Requirements for Kenyan Entities

In Kenya, entities that are part of multinational groups must comply with the three-tiered documentation approach. However, only MNEs with consolidated revenue exceeding 95 billion Kenyan Shillings (approximately €750 million) are required to prepare and submit all three documents (Local File, Master File, and CbCR) to the Kenya Revenue Authority (KRA).

Entities meeting this threshold must also notify the KRA by the end of their financial year. For example, companies whose consolidated revenue for the fiscal year ending December 2023 exceeds €750 million must notify the KRA by December 31, 2024, using the prescribed format. There are, however, exemptions regarding the submission of the Country-by-Country Report, depending on specific circumstances.

Requirements for Smaller MNEs

For MNEs that do not meet the €750 million revenue threshold, the requirement is limited to preparing and maintaining the Local File and the Master File, without the need for the CbCR.

Conclusion

As tax regulations continue to evolve, it is essential for MNEs to stay informed about their transfer pricing obligations. Compliance with the three-tiered documentation approach ensures transparency and helps mitigate risks associated with tax audits. If you have any questions or need assistance with transfer pricing or tax compliance, BDO is here to help and keep you updated on the latest developments.