Kenya updates its transfer pricing rules

Kenya replaced the Income Tax (Transfer Pricing) Rules, 2006 (the 2006 Rules) with the Income Tax (Transfer Pricing) Rules, 2026 (the 2026 Rules). The 2026 Rules took effect on 18 September 2026 under Legal Notice No. 186 of 2026.

The 2026 Rules widen the range of controlled transactions subject to review and require more detailed records. Taxpayers should assess whether their transfer pricing policies, agreements, accounting records, and conduct support the prices applied.

Key changes

1.    New and expanded definitions

a.    Commodity — covers agricultural produce, fisheries products, solid, liquid or gaseous minerals, hydrocarbons and their derivatives, products and natural minerals or mineraloids obtained from land or water, and any other good for which a publicly quoted price exists

b.    Controlled transaction and connected person — a controlled transaction is a transaction between related persons. The definition of ‘connected person’ covers the relationships and transactions in sections 2, 18, 18A, 18B, 18C, 18D, 18E, and 18F of the Income Tax Act (the Act). The definition extends beyond direct shareholding to cover direct or indirect ownership, management, control, common control, and arrangements governed by these provisions. Taxpayers should review their ownership and management structures, contracts, and dealings with associated parties to identify transactions governed by the 2026 Rules.

2.    Closer alignment with the OECD Transfer Pricing Guidelines

The latest consolidated Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines, released in 2022, address financial transactions, the transactional profit split method, and hard-to-value intangibles. The 2026 Rules bring aspects of the OECD approach into Kenya’s domestic transfer pricing framework. They expressly cover financing, insurance and reinsurance, business restructurings, cost distribution arrangements, derivatives, and commodity transactions.

Many Kenyan taxpayers relied on the OECD Guidelines where the 2006 Rules provided limited guidance. Common areas were intra-group financing, risk allocation, intangibles, business restructurings, benchmarking, and documentation. The 2026 Rules now give taxpayers and the Kenya Revenue Authority (KRA) a clearer domestic basis for pricing, documenting, and reviewing these transactions.

The Act already requires multinational enterprise (MNE) groups operating in Kenya with consolidated group turnover of at least KES 95 billion to follow the OECD’s three-tier documentation approach. The required documents are:

a.    Master file — an overview of the MNE group’s global operations, transfer pricing policies, value drivers, and allocation of income and economic activity. The Act requires the group to file it with KRA each year within six months after the last day of the MNE group’s reporting financial year.

b.    Local file — detailed support for the Kenyan taxpayer’s material controlled transactions. It covers the functional analysis, transfer pricing method, comparability analysis, financial data, and reasons why the pricing meets the arm’s length principle. The Act requires filing within the same six-month period.

c.    Country-by-country report — aggregate information by jurisdiction for the MNE group. It covers revenue, profit or loss before income tax, income tax paid and accrued, stated capital, accumulated earnings, number of employees, tangible assets other than cash and cash equivalents, and any other information the Commissioner requires. The ultimate parent entity or surrogate parent entity must file the report within 12 months after the last day of the group’s reporting financial year.

3.    Expansion of the transactions covered

The 2026 Rules expressly cover financing, insurance and reinsurance, business restructurings or reorganisations, cost distribution arrangements, derivatives, and any other transaction that may affect a person’s profit or loss.

Taxpayers must document these arrangements when they occur. Under the 2026 Rules, the transfer pricing file should cover:

• Organisational structure – the relationship between the Kenyan entity and each related party
• Related-party transactions – the nature, value, terms, and parties to each transaction, including transactions involving goods, services, and financing
• Functional analysis – the functions performed, assets used, and risks assumed by each party
• Economic analysis and benchmarking – the comparable search, selection criteria, adjustments, and arm’s length range
• Transfer pricing method – the method selected, the reasons for selecting it, and the supporting calculations
• Financial data – the accounts, segment data, allocation schedules, and reconciliations used in the analysis

4.    Updates to transfer pricing methods

The 2026 Rules retain the comparable uncontrolled price, resale price, cost-plus, profit split, and transactional net margin methods. As under the 2006 Rules, taxpayers must apply the method most appropriate to the enterprise, having regard to the nature of the transaction or class of transactions, the class of related persons, and the functions those persons perform in relation to the transaction.

The 2026 Rules refine the descriptions of the resale price and transactional net margin methods. They also require taxpayers to explain the selected method and, where relevant, the choice of tested party. The Commissioner may prescribe another method where the five listed methods cannot determine an arm’s length price.

5.    Quoted-price rules for commodities

For commodity exports and imports between connected persons, the 2026 Rules use the publicly quoted price to calculate taxable income, regardless of the price agreed by the parties. The quoted price may come from an international or domestic commodity exchange, a recognised and transparent price reporting or statistical agency, a government price-setting agency, or another index that unrelated persons use to set prices. A taxpayer may adjust the quoted price only if it provides evidence that the adjustment is appropriate and consistent with the arm’s length principle.

The 2026 Rules determine the quoted price by averaging the prices during the 15 days before and the 15 days after the shipping date shown in the relevant shipping documents.

A separate rule applies to transactions with unrelated persons. For an export, the agreed price applies if it exceeds the publicly quoted price on the shipping date. For an import, the agreed price applies if it is lower than the publicly quoted price on that date. The 2026 Rules treat the agreed price as the sale price or purchase price, as applicable, when computing the seller’s taxable income in Kenya.

Taxpayers should retain the shipping documents, quoted-price data, and support for each adjustment. If a connected purchaser later sells the exported commodities to an unconnected person, the taxpayer must also retain the third-party agreements and sales invoices. If the taxpayer cannot support an adjustment, the publicly quoted price applies.

6.   KRA can request more information

KRA may request more detailed transaction, pricing, and financial records than it could request under the 2006 Rules.

The requested records may cover transaction terms and values, payments by jurisdiction, connected persons, contracts, functional and comparability analyses, method and tested-party selection, pricing assumptions, comparability adjustments, financial statements, segment accounts, allocation keys, and the figures used in the analysis. The 2026 Rules require taxpayers to prepare these books and records, or translate them into English, when they determine the transfer price.

7.    Penalties and enforcement

The Tax Procedures Act provisions on fraud, failure to furnish returns, and underpayment of tax apply to transfer pricing matters. Any transfer pricing tax that remains unpaid is treated as additional tax.

What taxpayers should do now

For each material controlled transaction, taxpayers should reconcile the agreement, accounting treatment, functional analysis, pricing method, and financial data. Taxpayers should prioritise:

• Support for the selected method and, where relevant, the tested party, including reliable comparable data
• Agreements that do not match the parties’ conduct or accounting records
• Commodity transactions that lack quoted-price data, shipping documents, or support for adjustments
• Financing, guarantees, business restructurings, derivatives, insurance, reinsurance, and cost distribution arrangements that lack full support

What to watch

The OECD is revising Chapter VII of its Transfer Pricing Guidelines on intra-group services. The review covers the benefits test, shareholder and stewardship activities, cost allocation, mark-ups, and documentation. Groups with Kenyan management, technical, or shared-service charges should review the final guidance when the OECD publishes it.

Kenya’s advance pricing agreement (APA) regime took effect on 1 January 2026. The Kenya Revenue Authority published draft implementing regulations in November 2025. The draft regulations cover applications, negotiations, renewals, revisions, cancellations, compliance reports, record keeping, rollbacks, and compensating adjustments. Taxpayers with recurring or material controlled transactions should assess whether an APA could provide pricing certainty and reduce future disputes once the regulations are finalised.