Kenya has passed a new law preventing foreign companies from using transfer pricing to avoid taxes, a process which is quite popular in the region.
The Tax Procedures Act allows the Kenya Revenue Authority (KRA) to investigate suspicion of pricing agreements and gives the authority rights to reverse any that appear to be structured for the purpose of avoiding taxation.
“If you look at how most multinational companies work, they tend to transfer the bigger chunk of income to more safe jurisdiction in terms of taxation and they tend to allocate expenses in terms of cost to jurisdictions that have high taxation, especially regions like East Africa,” said Maurice Oduor, Investment Manager at Cytonn Investments.
According to Oduor, the government is trying to work on that because the Kenya Revenue Authority is still struggling in terms of collecting revenue.
“So these are just mechanisms put in place to improve revenue collection liability I think that there should be a long term debate in order to work out all the solutions,” said Oduor.
However he reckons that if clearing tax evasion in totally through the various jurisdictions, Kenya would need all countries to work together.
“I think Kenya is moving in this direction so that at least they start showing the revenue authority continues to collecting tax to fund the operations but the ultimate long-term solution would be to do away with the tax jurisdiction,” said Oduor.
He adds: “I think how they will have to go about it is through ensuring policy and ensuring that the tax policy is adhered to.”