Transfer Pricing in Kenya: court ruling on the median
The recent decision of the Kenya Tax Appeals Tribunal in the case of Cipla Kenya Limited v. Commissioner of Inland Revenue sets an important technical precedent on the interpretation of the interquartile range and the use of the median in the application of the Transactional Net Margin Method (TNMM) in Transfer Pricing.
Background to the dispute
The dispute arose from a tax assessment by the Kenyan tax authority for the 2018 fiscal year, in which Transfer Pricing adjustments were imposed on Cipla Kenya Limited, a subsidiary of the multinational pharmaceutical company Cipla Medpro (South Africa). The assessment included an adjustment to corporate income tax, interest, and penalties, initially amounting to approximately KES 78.6 million, which was subsequently reduced to KES 31.6 million.
The commissioner’s main argument was that the profitability reported by Cipla—based on an operating margin of 3.02%—was not within the interquartile range determined in its own analysis, which established a median of 4.74%. The commissioner argued that this median should be adopted mandatorily in accordance with the OECD Guidelines.
Tribunal’s ruling: Technical interpretation of the interquartile range
The Tribunal considered the commissioner’s position on the mandatory use of the median to be inadmissible. In its analysis, it relied on paragraph 3.57 of the OECD Guidelines, which states that any point within the interquartile range can be considered to be in accordance with the arm’s length principle, unless defects in comparability are found.
In addition, the tribunal noted that the commissioner himself had acknowledged that there were defects in comparability in the transactions reviewed. Therefore, invoking the mandatory use of the median—according to paragraph 3.62 of the Guidelines—was inapplicable, since that paragraph only applies when there are no material defects. Consequently, the court concluded that Cipla’s profitability was within acceptable limits under the arm’s length principle and annulled the Transfer Pricing adjustment.
Operating Costs and the Arm’s Length Principle
Another relevant point addressed by the Court was the deduction of certain labor and operating costs that the commissioner dismissed for alleged lack of documentation. The court held that, under the TNMM, these costs are determining factors in the analysis of margins and their artificial exclusion distorts the net result, potentially giving rise to double taxation.
The court noted that the costs claimed were properly accounted for and audited in the company’s financial statements and that their elimination would create unjustified inconsistencies in the application of the method. Consequently, it also annulled the adjustment related to those costs.
Conclusion
This ruling reinforces the importance of rigorous and contextualized analysis of interquartile margins and Transfer Pricing methods, in line with the OECD Guidelines. It also recognizes the validity of reasonable economic approaches in the presence of adequate financial documentation.
The case constitutes a reference for multinational taxpayers and tax authorities regarding the technical interpretation of the use of the median and the documentation of operating costs in Transfer Pricing studies. It also highlights the need for effective coordination between local rules and international standards, particularly in jurisdictions that are in the process of consolidating their tax legislation on international taxation.
Source: File No. KETAT/223/2025