Is there a mandatory use of the median: Checkpoint Technologies Kenya Limited vs. Commissioner of Domestic Taxes 

This is a case between the appellant Checkpoint Technologies Kenya Limited (CTK) and the respondent Commissioner of domestic taxes (Kenya Revenue Authority – KRA). The case illustrates that jurisdictions that implement transfer pricing rules applying the OECD guidelines will be held to account in line with those guidelines. In this case, KRA argued for a specific rate within the interquartile range, whereas the guidelines permit a rate within the interquartile range.  In other words, the taxpayer is able to choose their own rate within the acceptable range, provided there is sufficient evidence to support for that choice. 

Further detail 

The KRA conducted a review of CTK’s tax records in 2022 covering the periods 2017 to 2020 covering Corporation tax, PAYE and Withholding tax. 

CTK is a company incorporated in Kenya whose principal activities are information and communication technologies, information technology as well as software development. Furthermore, CTK provides pre-sale and marketing support services to its parent company, Check Point Technologies Limited (CPT). 

During the periods under review, CTK provided services to its foreign related party Checkpoint Software Technologies International Limited (CPT-IL). CTK charged a mark-up of 5% for the services provided to CPT-IL as according to their Group Transfer Pricing policy. CTK applied the Transactional Net Margin Method (TNMM) as the most appropriate transfer pricing method with the net cost-plus as the profit level indicator, to align the intercompany transactions to the arm’s length standard. 

Upon review of CTK’s tax in 2022 by the KRA, CTK provided transfer pricing documentation to the KRA to support the 5% mark-up it charged to CPT-IL for the periods under review. The documentation provided by CTK showed a transfer pricing benchmarked arm’s length range to support the transactions with CPT-IL. The benchmarked interquartile ranges are shown in the below table. 

The KRA observed that there was a deviation in the 5% mark-up applied by CTK from the recommended benchmark median rates as shown in the above table. These variations were noted for all the periods under review. In essence, the KRA argued that CTK is required to adopt the benchmarked medians position in an interquartile range showed in the above table instead of the 5% mark-up. 

CTK averred that the Transfer Pricing Rules enacted under the Kenyan Income Tax Act have adopted the transfer pricing methods as stipulated in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines) and that the transfer pricing rules do not require a taxpayer to adopt the median position. A taxpayer could be within the interquartile or full arm’s length range, provided there was sufficient support from an arm’s length perspective.  

The case was then submitted to the Tribunal where it was noted that KRA did not dispute CTK’s Transfer Pricing Policy, the KRA only disputed the 5% mark-up applied from the benchmarked arm’s length medians as shown in the above table.  

The Tribunal observed that the Transfer Pricing Rules enacted under the Kenyan Income Tax Act have adopted the transfer pricing methods as stipulated in the OECD guidelines which do not necessarily require a taxpayer to adopt the median position. The Tribunal is guided by Article 3.6 of the OECD guidelines in the absence of local legislation to the contrary, and it prohibits adjustments where the transfer price or margin complies with the OECD regulations and is within the arm’s length range. Which states that: 

“If the relevant condition of the controlled transaction (e.g. price or margin) falls outside the arm’s length range asserted by the tax administration, the taxpayer should have the opportunity to present arguments that the conditions of the controlled transaction satisfy the arm’s length principle, and that the result falls within the arm’s length range (i.e. that the arm’s length range is different from the one asserted by the tax administration). If the taxpayer is unable to establish this fact, the tax administration must determine the point within the arm’s length range to which it will adjust the condition of the controlled transaction.” 

The Tribunal noted that the signed agreement between CPT-KL and CPT-IL stipulates the mark up rate for related party dealings as 5%.  The Tribunal therefore found that that the mark-up rate as per the signed agreement between the Kenya subsidiary and its parent company was, at all periods covered by the KRA audit, within the arm’s length range as per the transfer pricing documentation prepared by the Appellant. 

Based on the above analysis, the Tribunal found that imposing the median measure as the arm’s length range is contrary to the OECD Guidelines, which allows a taxpayer to adopt any rate within the arm’s length range as the basis of related party transactions.