Following the requirement for multinational enterprise (MNE) groups to file a Country-by-Country (CbC) report in Kenya with effect from 2022, Kenya’s Finance Act, 2022 has provided further guidance that it is either:
The ultimate parent company (UPE)
The constituent entity appointed by the group, otherwise referred to as the surrogate parent entity (SPE)
of the MNE operating a reportable business unit of the MNE group in Kenya to file the CbCR report. The CbC report will consist of the identity and jurisdiction of each constituent entity, financial information, the number of employees and such other information as may be required by the Tax Authority.
This obligation will be applicable where the MNE group has consolidated revenue of KES95b (appx €750m) or more including extraordinary or investment income.
The legislation exempts the filing of a CbC report where the UPE is obligated to file a CbC report in its jurisdiction of tax residence, and that jurisdiction has an agreement for the exchange of information and a competent authority agreement that is in force with Kenya.
The CbC report should be made within 12 months from the MNE group’s financial year end by either the UPE or one of the constituent entities. Prior to the CbC reporting (CbCR), a CbCR notification should be submitted before the financial year end indicating the UPE or SPE responsible for CbCR filing and the jurisdiction of filing.
There is also a requirement for MNE groups to prepare and file their master file (MF) and local file (LF) with the Commissioner annually within six months from the financial year end of the MNE group. The MF contains standardized information about the MNE group relevant for all members of the MNE group while the LF contains information specific to the local entity. The thresholds identified above will also apply in this case.
As a member of the Organisation for Economic Co-operation and Development (OECD)/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS), Kenya has made another important stride towards the implementation of BEPS Action 13 on transfer pricing documentation and CbCR. Under the Inclusive Framework, over 135 countries and jurisdictions are collaborating on the implementation of minimum standards to tackle tax avoidance, improve coherence of international tax rules and ensure a more transparent international tax environment.
Effective financial year 2022, the Finance Act 2022 has introduced a three-tier annual transfer pricing filing requirement for MNE groups operating in Kenya as either a UPE or a constituent entity. This requirement now covers both subsidiaries and branches of MNEs operating a reportable business unit of the MNE in Kenya. The filing requirement comprises of a CbC report, MF, and LF, with each report and file providing specified information relating to the MNE group’s cross-border activities.
Notably, this move is an expansion of the covered entities for CbCR to include MNE groups whose UPE is not in Kenya and an additional compliance requirement for MNE groups to file the MF and LF annually. Previously, under the Finance Act, 2021 only Kenyan UPEs were required to file a CbC report effective 1 January 2022 and there were no requirements for the filing of an MF and LF. Prior to this MNE groups were required to prepare a transfer pricing policy, which was to be submitted to the tax authority upon request.
Effective financial year 2022, this is an annual reporting requirement for subsidiaries and branches of MNE groups operating a reportable business unit of the MNE group in Kenya. These are MNE groups whose consolidated group revenue, including extraordinary or investment income, is KES95b or more.
A qualifying MNE group already filing the CbC report through either its UPE or SPE in a jurisdiction that has an agreement for exchange of information with Kenya is excluded from the CbCR requirement in Kenya. However, the constituent entity in Kenya will be required to file the CbC report if notified by the revenue authority of a systemic failure to comply with the agreement.
The report is to be submitted within 12 months from the financial year end by either the UPE or one of the constituent entities of the MNE group (on behalf of the group) appointed by the group otherwise referred to as the SPE. Specifically, where there are multiple entities of an MNE group in Kenya, the MNE group may designate one of the entities to file the CbC report in Kenya.
The CbC report will provide specified details of each of the constituent entities of the MNE and the jurisdictions of their tax residence, financial activities, and resources excluding cash and cash equivalent in the respective jurisdictions. The Commissioner may require additional information and specify the reporting format.
CbCR notification requirement
Prior to submitting the CbC report, a constituent entity in Kenya of the qualifying MNE group will be required to file a CbCR notification to the Commissioner within the financial year. The notification will include certain details of the UPE and SPE that will be responsible for the CbCR and the jurisdiction of filing. The Commissioner to specify the format of the notification.
Master file and local file filing requirement
Effective financial year 2022, these have been made contemporaneous and are annual filing requirements for subsidiaries and branches of MNE groups operating a reportable business unit of the MNE group in Kenya. Similar to the corporate income tax return, the MF and LF should be filed within six months after the last day of the reporting financial year of the MNE group. The Commissioner is also expected to specify the manner of filing of the MF and LF.
The Act has prescribed specific details and information to be included in the MF and the LF. Overall, the MF contains standardized information about the MNE group relevant for all members of the MNE while the LF contains information specific to the local entity’s activities, structure, business strategies and material transactions. The Commissioner may as well require additional information.
Specified penalties for non-compliance
Failure to comply with the CbCR, MF and LF reporting and filing requirements will be an offense subject to a fine not exceeding KES1m (approximately US$8,500 per current forex rate), a prison term not exceeding three years, or both upon conviction.
It is expected that the Commissioner will provide further guidance on the following issues:
The format of the CbCR notification to be made within the financial year
The manner and format of filing of the CbC report by the affected MNEs.
The manner and format of filing of the MF and LF for the MNEs
Identity of the jurisdictions with which Kenya has agreement for exchange of information
Identity of the jurisdictions where there has been a systemic failure
The measure of material transactions for purposes of LF preparation and filing
As we await guidance from the Commissioner on the above issues:
MNE groups with operations in Kenya should evaluate their operations for FY2022 and subsequent periods to confirm whether they are covered for the CbCR requirement and comply.
All MNE groups should review and prepare MF and LF for purposes of filing with the Kenya Revenue Authority within six months from the financial year end.
For additional information with respect to this Alert, please contact the following:
Ernst & Young (Kenya), Nairobi
Ernst & Young Société d’Avocats, Pan African Tax – Transfer Pricing Desk, Paris
Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London
Ernst & Young LLP (United States), Pan African Tax Desk, New York