Answer ... Yes; anti-avoidance rules applicable to corporate taxpayers are contained in both statute (which is the primary source of law) and jurisprudence.
Answer ... The main anti-avoidance rules are set out under Section 23 of the Income Tax Act, which provides as follows:
Where the Commissioner is of the opinion that the main purpose or one of the main purposes for which a transaction was effected (whether before or after the passing of this Act) was the avoidance or reduction of liability to tax for a year of income, or that the main benefit which might have been expected to accrue from the transaction in the three years immediately following the completion thereof was the avoidance or reduction of liability to tax, he may, if he determines it to be just and reasonable, direct that such adjustments shall be made as respects liability to tax as he considers appropriate to counteract the avoidance or reduction of liability to tax which could otherwise be effected by the transaction.
Under the Tax Procedures Act, 2015, ‘tax avoidance’ is defined as a transaction or scheme to avoid liability to tax under any tax law. The penalty for tax avoidance is twice the amount of tax avoided or intended to be avoided.
Answer ... Controlled foreign companies (CFCs): Kenya has no specialised rules on CFCs. However, there are restrictions on the deductibility of interest and foreign exchange losses of companies that are foreign controlled and thinly capitalised.
Thin capitalisation: In Kenya, a company is thinly capitalised if all of the following criteria are satisfied:
- The company is controlled by a non-resident person alone or together with four or fewer persons.
- The company is not a bank or financial institution.
- The highest amount of all loans held by the company at any time exceeds the sum of three times the revenue reserves (including accumulated losses) and the issued and paid-up share capital of all classes of shares of the company.
A company that is thinly capitalised cannot claim a deduction on the interest expense incurred by the company on loans that exceed the 3:1 ratio. The company also cannot claim a deduction for any foreign exchange loss realised while the company remains thinly capitalised. For companies in the extractive sector (oil, gas and mining), the debt-to-equity ratio is 2:1.
Deemed interest rules: Kenya has “deemed interest” rules which apply with respect to interest-free loans from non-resident shareholders. Where a non-resident shareholder has extended a loan to a resident company on an interest-free basis, the resident company is required to compute a deemed interest charge based on the prevailing treasury bill rates and remit the withholding tax of 15% to the KRA.
Answer ... Yes. A taxpayer may apply to the KRA for a private ruling to seek clarity on a specific issue. The private ruling sets out the KRA’s interpretation of a tax law in relation to a transaction entered into, or proposed to be entered into, by the taxpayer.
An application for a tax ruling should be in writing, setting out the relevant details of the transaction in question and the taxpayer’s interpretation of the relevant law, as well as the specific question on which the KRA’s interpretation is required. The law requires the KRA to respond within 45 days of receipt of the application.
Where the taxpayer has made a complete and accurate disclosure of the transaction and the transaction has proceeded in all material respects as described in the application, the private ruling shall be binding on the KRA. A private ruling, however, is not binding on a taxpayer.
Answer ... Yes. A company is required to ensure that related-party transactions are at arm’s length. The related-party transactions that are subject to transfer pricing include:
- the sale or purchase of goods;
- the sale, purchase or lease of tangible assets;
- the transfer, purchase or use of intangible assets;
- the provision of services; and
- the lending and borrowing of money.
The company is therefore required to prepare a transfer pricing policy to justify the pricing arrangements. The transfer pricing methods which can be applied in determining the arm’s-length price include:
- the comparable uncontrolled price method;
- the resale price method;
- the cost-plus method;
- the profit split method; and
- the transactional net margin method.
The KRA is empowered to specify conditions and procedures for the application of the methods for determining the arm’s-length price and to adjust the prices if they do not conform to the arm’s-length principle. The policy should be prepared and submitted to the KRA upon request.
The transfer pricing rules are broadly modelled along the principles set out in the Organisation for Economic Co-operation and Development Transfer Pricing Guidelines for Multinational Enterprises.
Answer ... The tax authorities must commence an audit before the expiry of five years after the end of a year of income. The KRA may go back past five years where fraud, wilful neglect or evasion is proven. There is no time limit for completing tax audits. However, they are normally completed within a reasonable time, especially if there are no major disputes.