In taxation, transfer pricing refers to the rules of engagement for pricing transactions between related enterprises, for example a Multi-National Enterprise. Because of the potential for cross-border controlled transactions to distort taxable income, many tax jurisdictions across the world can adjust intragroup transfer prices to reflect those that would have been charged by unrelated enterprise dealings (uncontrolled transaction). Uncontrolled transaction makes use of the arm’s length principle.
Transfer pricing affects the tax liable. Related enterprises can control the price of their transactions, price of purchases, sales, services offered, intangible property and this affects the net margin (profits) consequently taxes payable. In Kenya, there are so many MNEs and therefore many related enterprise transactions. To arrive at an arm’s length price of transactions between related enterprises a comparability analysis is carried out, in consideration of functions assumed, assets used and risks assumed by each enterprise. Any material differences that affect the price are eliminated.