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In a pivotal decision, Kenya’s Tax Appeals Tribunal (TAT) recently ruled in the case of Avic International Beijing (EA) Ltd v. Commissioner of Domestic Taxes (TAT No. E786 of 2023). The dispute addressed whether the Resale Price Method (RPM) or the Transactional Net Margin Method (TNMM) was the appropriate transfer pricing method for controlled transactions involving the import and assembly of vehicle parts.
For multinational enterprises (MNEs), this case provides a textbook example of why strong transfer pricing documentation, accurate tested party selection, and alignment with the arm’s length principle are critical in today’s increasingly aggressive global tax environment.
Background: What Happened?
Avic International Beijing (EA) Ltd, the Kenyan subsidiary of a Chinese state-owned enterprise, imported CKD (completely knocked down) kits from its parent company in China. It then assembled and sold finished vehicles in Kenya.
To justify its intercompany pricing, Avic applied the resale price method—a transfer pricing technique commonly used when the reseller adds limited value. However, the Kenya Revenue Authority (KRA) rejected RPM, stating that Avic’s local activities—including assembly, marketing, and risk-bearing—were too significant to justify that pricing method.
KRA instead applied the transactional net margin method and issued a substantial tax assessment of Kshs 514 million (~USD 4 million) covering 2016–2021.
Observation 1:
The taxpayer’s selection of RPM underestimated the complexity of the Kenyan entity’s operations. Assembly and local functions altered the value chain in a way that made RPM inappropriate under OECD-aligned transfer pricing guidelines and failed to reflect an accurate arm’s length price.
Tax Authority Position vs Taxpayer’s Claim
Avic argued that RPM was appropriate due to the simplicity of resale, minimal value addition, and the OECD Guidelines’ support for RPM in distribution models. They also pointed to the gross profit margin on resale as an indication of fairness.
KRA, however, took a different stance:
Observation 2:
This case exposed a major misstep in tested party selection. Avic initially selected the Kenyan company, only to reverse course mid-proceeding, stating that the Chinese parent was the less complex party. That inconsistency was damaging—especially since OECD transfer pricing documentation requires consistency and accurate reflection of the transaction in question.
Tribunal’s Verdict: TNMM Wins
The Tribunal upheld KRA’s position and rejected Avic’s RPM approach, stating:
Observation 3:
This ruling places a heavy emphasis on the burden of proof. Avic failed to submit a corrected benchmarking report or convincingly defend its tested party logic—leaving its transfer pricing documentation non-compliant with global standards. In jurisdictions with strong administrative law, tax authorities would typically be required to submit their own comparable uncontrolled transactions. However, in this case, the adjustment stood without a comparable uncontrolled price (CUP) benchmark.
Key Lessons for Multinational Enterprises
1. Transfer Pricing Documentation Must Be Robust and Aligned
Documentation should clearly reflect the chosen transfer pricing methodology, rationale for tested party selection, and alignment with the functions, assets, and risks of each entity in the controlled transaction.
2. Tested Party Selection Must Be Consistent
One-sided transfer pricing methods like TNMM or RPM rely heavily on the right tested party. Flip-flopping mid-audit is risky and undermines the credibility of the analysis.
3. TNMM is Resilient in Complex Operational Models
Where gross margin comparability is weak or value addition is high, TNMM remains the most defensible transfer pricing method. It is less sensitive to product-type and better captures the full economic contribution of an entity via net profit margins.
4. Tax Authorities Are Raising the Bar
Kenya’s ruling reflects a global trend. Tax authorities are becoming more assertive in challenging documentation gaps, benchmarking flaws, and mismatched pricing methods—especially under the lens of OECD economic co-operation frameworks and length transfer pricing requirements.
How Reptune Helps Multinational Corporations
Staying ahead of transfer pricing regulations across tax jurisdictions requires automated, reliable, and scalable solutions. Reptune helps MNEs:
From tested party consistency to benchmark defensibility, Reptune helps eliminate the risks that tripped up Avic in this case.
Conclusion
Kenya’s first major Tribunal decision on transfer pricing method selection sends a clear message to MNEs: documentation, consistency, and method alignment are non-negotiable.
When selecting the right method for controlled transactions, start with a solid functional analysis and defend your choice with reliable benchmarking. Most of all, choose your tested party carefully—and stick with it.
Ready to future-proof your transfer pricing documentation?
Book a demo with Reptune and stay ahead of compliance in every tax jurisdiction.
FAQs
1. Why did the Tribunal reject the Resale Price Method (RPM)?
Because Avic Kenya added significant value through assembly and marketing, altering the price charged and making RPM an inappropriate method.
2. What’s the importance of tested party selection?
It determines which entity’s profitability is benchmarked and must reflect the least complex party in the transaction in question.
3. How does TNMM compare to RPM in practice?
TNMM is more flexible and often preferred for entities with complex functions, assets, and risks, particularly where comparable uncontrolled transactions are scarce.
4. What are documentation requirements under OECD transfer pricing regulations?
MNEs must maintain a master file, local file, and Country-by-Country Report to support arm’s length transfer pricing positions.
5. How can MNEs manage global transfer pricing risk?
By using solutions like Reptune to automate compliance, align methods with operations, and conduct continuous risk assessments across all tax jurisdictions.
