Related Party Transactions Disclosure, Income Tax Company Return
Kenya Revenue Authority (KRA) through the notice dated 15th June 2023, notify taxpayers that the
Income Tax – Company Return on the iTax platform has been enhanced to provide for declaration of
related party transactions by persons with related parties and whose ascertainment of gains or
profits from business is subject to the provisions of Sections 18 or 18A of the Income Tax Act, Cap
470.
What to do?
When filing their returns, all taxpayers with related party transactions are required to answer, “Yes”,
to the question, under the basic information sheet of the Income Tax Company return, on whether or
not they have related parties outside Kenya or controlled transactions. The relevant details of the
related party transactions should then be captured under sheet “B2_Related_party_transactions.
What is the Impact of the Enhanced Disclosure Requirements?
The implementation of enhanced disclosure requirements by the Kenya Revenue Authority (KRA)
will significantly improve the visibility of related party transactions. This initiative aims to enhance
transparency and accountability in such transactions, facilitating better risk assessment and the
selection of cases for tax audits.As a result of these enhanced disclosure requirements, we anticipate an intensified focus by the
KRA on compliance checks. This may lead to an increased demand for transfer pricing
documentation, particularly for supporting the application of arm’s length pricing in controlled
transactions. Consequently, it is crucial for businesses to maintain up-to-date transfer pricing policies
and records of their related party transactions, especially those involving non-resident entities and
those conducted with persons in preferential regimes such as Export Processing Zones and Special
Economic Zones.
Who is a related party?
A person or entity that is related to the entity that is preparing its financial statements (the reporting
entity) or a member of key management personnel or a close member of that person’s family, has
control, joint control or significant influence etc.
What is a related party transaction?
A related party transaction is a transfer of resources, services or obligations between a reporting
entity and a related party, regardless of whether a price is charged. Common examples include:
- Transactions between an entity and its owner.
- Transactions between an entity and another entity when both entities are under the common control of a single entity or person.
- Transactions in which an entity or person that controls the reporting entity incurs expenses directly that otherwise would have been borne by the reporting entity.
What do you need to disclose?
a) Parent-subsidiary relationships
Disclose the name of the reporting entity’s parent and the ultimate controlling party irrespective of
whether there have been any related party transactions.
b) Key management personnel compensation
Disclose key management personnel compensation in total. Key management personnel are those
persons having authority and responsibility for planning, directing and controlling the activities of the
entity, directly or indirectly, including any director (whether executive or otherwise) of that entity.
Compensation includes all employee benefits including those in the form of share-based payments.
c) Details of related party transactions
Disclose the nature of the related party relationship, transactions, outstanding balances and
commitments necessary to understand the potential effect of the relationship on the financial
statements. The disclosures include:
- the nature of the relationship.
- the nature of the transactions e.g., purchases or sales.
- the amount of the transactions.
- the amount of outstanding balances including their terms and conditions, security, nature of
- consideration provided and details of any guarantees given or received.
- provisions for uncollectable receivables related to the amount of outstanding balances.
- expense recognized in respect of bad or doubtful debts during the period.
- These disclosures are required separately for each of the following:
- entities with control, joint control or significant influence over the entity.
- entities over which the entity has control, joint control or significant influence.
- key management personnel.
- other related parties.
The standard requires that an entity does not state that the related party transactions were at arm’s
length unless such terms can be substantiated.
The Standard allows for aggregation of items of similar nature except when separate disclosure is
necessary for an understanding of the effects of related party transactions on the financial
statements of the entity
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