Home Business Regulations KRA’s strict regulations for cross-border trading to increase taxes

KRA’s strict regulations for cross-border trading to increase taxes

KRA offices along Haile Selassie Avenue
KRA offices along Haile Selassie Avenue

The Kenyan government is targeting cross-border transactions to close loopholes that enable companies to evade their fair share of taxes. The Kenya Revenue Authority (KRA) has issued a public notice stating that Kenyan companies engaging in transactions with non-resident individuals or entities must disclose the details of these deals, including the nature and amount of payment, on the iTax platform.

The KRA’s notice explains that the enhanced iTax platform now allows for the declaration of related party transactions by individuals or businesses subject to sections 18 or 18A of the Income Tax Act, where gains or profits from a business are determined. This move is seen as a step towards addressing the challenges associated with transfer pricing, which refers to the manipulation of transaction costs across different jurisdictions by multinational corporations to exploit lower tax rates.

By implementing this reporting requirement through the iTax platform, the KRA aims to monitor all cross-border transactions continuously and conduct transfer pricing audits more effectively. Previously, many multinational firms considered transfer pricing policies as optional, rather than necessary. However, this new provision will ensure that the KRA has visibility into all transactions and can take appropriate action.

Experts suggest that this development marks the beginning of country-by-country reporting. With access to this data, the KRA will be able to identify areas of tax base erosion and implement targeted interventions accordingly. Furthermore, recent amendments to Section 10 of the Income Tax Act in the Finance Bill 2023, regarding the disregard of withholding tax paid, are closely linked to this initiative.

The government aims to reduce the corporate income tax gap in Kenya by at least Sh1.5 billion in the 2023/2024 fiscal year. The National Treasury’s Budget Policy Statement for 2023 highlights its goal of reducing the country’s corporate income tax gap from 32.2 percent to 30 percent, thereby minimizing the estimated foregone amount from Sh21.6 billion to Sh20.2 billion.

Over the past five years, corporate income tax has consistently contributed an average of Sh367.3 billion in revenue to the KRA, making it the second-largest source of tax income after Pay As You Earn (PAYE).