Kenya’s 2025 Finance Bill introduces Advance Pricing Agreements (APAs), giving multinationals a path to negotiate tax terms in advance. Supporters call it a step toward predictability and efficiency, but critics warn of loopholes, lost revenue, and inequity.
Kenya is poised to overhaul how it taxes multinational corporations. The Finance Bill 2025 proposes introducing Advance Pricing Agreements (APAs), a tool that would allow large firms to pre-negotiate the tax treatment of cross-border transactions with the Kenya Revenue Authority (KRA). Seen as a solution to long-running transfer pricing disputes, APAs are being framed as a way to foster certainty, reduce litigation, and align Kenya with international tax norms.
What Are Advance Pricing Agreements?
Advance Pricing Agreements are legally binding arrangements between the KRA and multinational companies that define how prices should be set for transactions between related entities, such as a Kenyan subsidiary and its foreign parent. These rules cover the exchange of goods, services, and intellectual property, and aim to limit transfer mispricing, a tactic where firms shift profits to low-tax jurisdictions by manipulating internal pricing.
According to the proposal on the Finance Bill 2025, the agreement can last for up to five years. However, KRA can cancel it if the company gave false or incomplete information.
A Tool for Certainty or Concession?
The introduction of APAs comes amid Kenya’s push to modernize its tax administration and curb base erosion and profit shifting (BEPS) by global corporations. A 2020 study by Global Financial Integrity found that Kenya loses around KSh 11.5 billion ($88 million) annually due to illicit transfer pricing practices. High-profile disputes, like the KRA’s pursuit of flower exporter Karuturi Ltd. in 2013 over KSh 962 million in alleged tax evasion, illustrate the scale of the issue.
Read: Why Kenya Now Wants the Wealthy to Trade Shares Tax-Free
Supporters argue that APAs offer a path to proactive enforcement, especially as Nairobi positions itself as an emerging financial hub. In 2024, foreign direct investment (FDI) inflows into Kenya reached $1.5 billion, driven by sectors like energy and financial services. Tax certainty through APAs could enhance investor confidence and attract more multinationals looking for a predictable regulatory environment.
The KRA’s Balancing Act
From the KRA’s standpoint, APAs could ease the burden of transfer pricing enforcement. However, this approach is time-consuming. Additionally, pre-agreed pricing through APAs could reduce backlog and free up resources to focus on other tax evasion tactics, such as inflated import invoices and underreported expatriate salaries.
Read: Finance Bill 2025: Why Global Firms May Soon Be Rushing to Register in Kenya
The framework also mirrors global standards. The OECD Transfer Pricing Guidelines, which serve as a reference for international tax cooperation, encourage the use of APAs to prevent disputes and ensure fair tax treatment across jurisdictions.
Risks of Abuse and Revenue Loss
Despite their potential, APAs carry substantial risks. Critics warn that a five-year window without review could enable firms to exploit outdated terms, especially if their operations or profit margins change. The KRA’s ability to revoke agreements based on misrepresentation is limited, particularly if enforcement resources are stretched.
There is also concern that APAs could follow the path of Kenya’s problematic Double Taxation Agreements (DTAs). A 2019 court ruling exposed that several DTAs, including those with Mauritius and Singapore, were heavily tilted in favor of foreign investors, reducing Kenya’s ability to collect taxes on key revenue streams like management fees and capital gains. Poorly negotiated APAs could entrench similar disadvantages, especially if corporate interests outweigh regulatory oversight.
The transfer pricing loophole remains a pressing issue. Between 2018 and 2020, KRA uncovered schemes where firms undervalued exports or overvalued imports to manipulate taxable income. The agricultural sector, particularly flower farms, has been a hotspot. Companies like Van den Berg Kenya Ltd. have faced scrutiny over alleged underpricing of exports to parent companies abroad.
A 2024 report by CGIAR warned that poorly designed tax reforms, like VAT hikes, could push over 100,000 Kenyans into poverty by 2025. If APAs reduce corporate tax obligations without a corresponding increase in revenue elsewhere, the burden may fall disproportionately on ordinary taxpayers.
Jefferson Wachira is a writer at Africa Digest News, specializing in banking and finance trends, and their impact on African economies.