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Beta Healthcare International Limited vs. Commissioner of Tribunal – A Battle Of Transfer Pricing Methods
Beta Healthcare International Limited vs. Commissioner of Tribunal – A Battle Of Transfer Pricing Methods
On 9 February 2024, the Tribunal issued a ruling in the case KETAT 143 (KLR) between the appellant Beta Healthcare International Limited (Beta Kenya) and the respondent the Commissioner of Legal Services and Board Coordination (KRA). The matter in dispute was the appropriate transfer pricing method to apply to intragroup sales, with the KRA arguing for comparable uncontrolled pricing (CUP) that were higher than the prices used by Beta Kenya’s application of the transactional net margin method (TNNM). A key point working against Beta Kenya was that it had failed to supply all the relevant information to support its use of TNNM. Businesses that need to apply transfer pricing should be ready with appropriate documentation to support the transfer pricing method they have chosen.
Further detail
Beta Kenya is a manufacturer of pharmaceuticals products in Kenya for distribution by its related parties i.e., Aspen Pharmacare Nigeria Limited (Aspen Nigeria), Beta Healthcare Uganda Limited (Beta Uganda), Kama Industries Limited (Kama) and Shelys International Limited (Shelys Tanzania). The sales to related parties are governed by agreements signed between Beta Kenya and each of the corresponding related parties. The agreement states that Beta Kenya should earn an Operating Margin of 5% to 8% on distribution of products to related parties on a segment-by-segment basis. Beta Kenya also sells its products to third party distributors and retailers.
The KRA issued a notice of assessment dated 25 November 2021 for the amount of KHS 480,175,287 of which Beta Kenya objected via a letter dated 23 December 2021. Thereafter, between December 2021 and May 2022, Beta Kenya and the KRA engaged through meetings and exchanges of correspondence and Beta Kenya provided additional information and various clarifications as requested by the KRA.
From its audit, the KRA established that Beta Kenya was trading with both its related parties and third parties. However, the sales to the related parties were noted to have been concluded at significantly lower prices as compared to the pricing of similar products sold to third party distributors.
The KRA averred that Comparable Uncontrolled Pricing (CUP) method is a traditional transaction method as prescribed by the Organisation for Economic Co-operation and Development (OECD) in the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines) which looks at the terms and conditions of transactions made between both related and unrelated parties to ensure arm’s length pricing.
To determine the arm’s-length transfer prices using the internal CUP method, a company must find examples of comparable transactions it has made with third parties. That in order to be compliant with Kenyan transfer pricing regulations and OECD Guidelines, the CUP method requires the terms of transactions with related parties to be the same as those of the third-party transactions.
The KRA averred that the analysis established that Beta Kenya’s sales to the related entities were concluded on similar terms to the third party sales but at lower sales values. They also commented that in various instances, the prices charged to the related entities were at a fraction of the third party prices, in some instances, at half the third party prices.
The KRA averred that Beta Kenya sells similar products to third party customers; the similarity of products and the underlying terms of sale set a clear presence of internal comparable which at Paragraph 2.4 read together with Paragraph 2.3 of the OECD TP Guidelines give preference to use of the CUP method as the most appropriate method.
Beta Kenya argued that it does not consider the CUP to be the most appropriate method in determining the arm’s length nature of the transaction price of its products due to the low degree of comparability with the internal CUP proposed by the KRA. Beta Kenya submitted that the Transactional Net Margin Method (TNMM) is the most appropriate transfer pricing method for its transactions using the Operating Margin as the profit level indicator.
The genesis of this dispute was the imposition of a different transfer pricing method by the KRA on Beta Kenya’s transactions. In conclusion, the Tribunal ruled in favour of KRA as Beta Kenya had failed to supply appropriate information (which it later produced) during the enquiry and also to the Tribunal in preparation for the hearing.
Although transfer pricing is not an exact science, proper understanding and appropriately applying transfer pricing methods helps strengthen a case. In the case of Beta Kenya versus the Commissioner for KRA, it was evident that the taxpayer would have been able to support and argue its case better if it had submitted all the required documents for using a TNMM and achieving an Operating Margin of between 5% to 8%.
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