The ruling of the Tax Appeal Tribunal of Kenya, issued on January 16, 2026, in the case of Kenya vs Delmonte Kenya Limited (Tax Appeal E1263 of 2024), sets an important precedent for transfer pricing audits. The Tribunal dismissed the taxpayer’s appeal and upheld the assessments relating mainly to the 2018 period, reinforcing the requirement for consistency between functional characterization, method selection, and documentary evidence.
Delmonte Kenya Limited operates an integrated pineapple business in Kenya, ranging from cultivation and harvesting to processing, packaging, and exporting products. The controlled transactions under review included sales to related distributors abroad, refunds and surcharges of internal costs, and intra-group loan agreements, which presented a complex transfer pricing analysis scenario.
1. Basis of the Dispute: Functional Characterization and Transfer Pricing Methods
The core of the dispute lay in the functional characterization of Delmonte Kenya. The taxpayer argued that it should be treated as a cost-oriented producer-service, justifying a routine return, while market functions and residual profits should correspond to related entities outside Kenya.
In response to this argument, the Kenya Revenue Authority (KRA) questioned both the appropriateness of the methodological selection—based on a Transactional Net Margin Method (TNMM) approach with a markup on full costs—and the lack of supporting documentation to substantiate the choice of method and the allocation of functions and risks.
The Court agreed with the authority that Delmonte Kenya had failed to demonstrate, in a reliable manner:
- That its functional characterization was consistent with the functions actually performed.
- That the methods applied were the most appropriate given the economic facts.
- That the documentation provided convincingly supported its tax position.
This position emphasizes that, beyond a formal presentation of data, consistency between economic reality and the transfer pricing methodology applied is essential to support a multinational’s pricing policy.
2. The Selection of the Tested Party and its Impact on Profitability Determination
A critical aspect of the ruling was the determination of the tested party in the application of the TNMM. According to international guidelines, when applying TNMM or similar methods, the tested party must be the party that:
- Has a less complex functional analysis.
- Allows for the identification of reliable comparables.
- Adequately reflects functions, assets, and risks.
The Court concluded that Delmonte Kenya did not meet these criteria. On the contrary, it considered that DMI GmbH, a related entity, had a less complex functional analysis and was more suitable as the tested party. The inappropriate choice of the tested party invalidated the reliable application of the TNMM in this context.
This finding underscores two fundamental principles of transfer pricing analysis:
- The preponderant role of the actual economic function over mere contractual formality.
- The need for the tested party to accurately reflect the relevant economic activity in the tax jurisdiction where profitability is analyzed.
3. Commercial substance in intra-group financing and markups
In addition to intercompany sales, the Court addressed the nature of intra-group loan agreements and other internal markups. The tax authority had pointed out that these instruments lacked commercial substance or arm’s length support, leading the Court to confirm that these transactions could not justify deductions or preferential conditions without demonstrable economic support.
This approach reaffirms a criterion that tax authorities in various countries have repeatedly adopted: intra-group financial instruments, in order to be recognized for tax purposes, must exhibit substantial conditions comparable to those that would exist between independent parties. The absence of such substance tends to disqualify the tax treatment claimed by the taxpayer.
4. The Role of Documentation and Comparability Analysis
One of the Court’s strongest criticisms of Delmonte Kenya was the insufficiency of its transfer pricing documentation. It was not enough to present a basic study; evidence was required that:
- Clearly disaggregated the functions and risks of each related party.
- Justified the choice of method with verifiable comparables.
- Linked operating results to independent market patterns.
In the absence of this robust documentation, the tax authority relied on its power to select alternative methods or adjust operating results, in line with arm’s length principles and international best practices.
This element of the ruling is particularly relevant for multinational groups with complex operations in economies where documentation may be subject to rigorous scrutiny, and highlights the importance of an evidence-based approach to support transfer pricing policies.
5. Practical Implications of the Ruling for Multinational Groups
The Kenyan Tax Tribunal’s decision has far-reaching practical implications:
- Assessment of functions and risks as the basis for analysis: companies must invest in detailed functional analyses that genuinely reflect their local business model.
- Choice and application of transfer pricing methods: It is not enough to adhere to a traditional method; its relevance must be demonstrated with clear evidence and valid comparables.
- Documentation as a tax defense: Transfer pricing studies must be complete, up-to-date, and consistent with the operational reality of each entity.
- Risk of significant tax adjustments: Lack of substance and documentation can lead to adjustments that severely impact the local tax burden.
This case illustrates how African tax authorities are adopting more sophisticated approaches aligned with international standards, pressuring multinationals to raise the quality of their transfer pricing policies and documentation.
Anticipating today avoids adjustments tomorrow
The case of Kenya vs. Delmonte Kenya Limited confirms that tax authorities prioritize economic substance, correct functional characterization, and technically defensible documentation. Deficiencies in these areas can lead to significant adjustments, even in structures considered routine by the taxpayer.
In this context, working with a company specializing in transfer pricing allows you to anticipate risks, strengthen your tax position, and face audits with greater confidence.
At TPC Group, we support multinational groups in reviewing and defending their transfer pricing policies, aligning methodology, evidence, and economic reality before contingencies arise.
Source: TPCases