Unilever Kenya was selling goods to Unilever Uganda and KRA held that the transactions were not at arm’s length being less than the price at which goods were sold to local customers. These goods had been marked up by only 5% between the two companies leading to loss to the Kenyan Company.
KRA invoked Section 18 (3) of the Income Tax Act, Chapter 470 of the Laws of Kenya (the Act) which requires transactions to be at arm’s length. Long protracted court battle led to a land mark ruling that due to the absence of Kenyan transfer pricing legislation, a multinational could not be faulted for using its own recognized transfer pricing principles. This ruling shaped the transfer pricing rules 2006 which were enacted a couple of months later.