The Kenya Revenue Authority (KRA) has ordered Del Monte Kenya to pay KSh 1.76 billion after the Tax Appeals Tribunal dismissed its appeal over a transfer pricing dispute.
In a ruling, the tribunal found that the fresh produce company could not justify why it was shifting profits to offshore companies when the real value of the business is created in Kenya.
“The tribunal found that the pineapple giant could not justify why it was shifting profits to offshore companies when the real value of the business is created in Kenya,” read part of the ruling.
KRA’s 2018 audit revealed that Del Monte used a cost-plus pricing model that artificially reduced its Kenyan profits while favoring related foreign distributors.
The court held that multinationals cannot use paperwork to export profits when the actual work, risks, and value addition happen on Kenyan soil.
Tribunal Rejects Del Monte’s Transfer Pricing Defense
The tribunal conducted an audit of the Appellant’s transfer pricing affairs for the period (2018) to ascertain its compliance with the applicable tax legislation.
“The Respondent erred in fact and in law by disregarding the Del Monte functional analysis, resulting in an incorrect characterization of the Appellant and assessing tax on the related party’s transaction on the sale of fresh and processed pineapples based on the assumption that the Appellant did not earn an arm’s length return, leading to margin adjustments.”
The tribunal added that Delmonte erred in law by failing to consider the benchmarking study supporting the 4.83% markup applied by the Appellant in respect of the sale of processed and fresh pineapples to Del Monte International (“DMI GmbH”).
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Additionally, the Delmonte was found to have erred in law by failing to consider the Transactional Net Margin Method (“TNMM”) using full cost mark-up (“FCMU”), and instead opting for the deductive method.
However, Del Monte maintained that it had followed the rules and priced its transactions using a standard cost-plus approach, supported by a benchmarking study showing that its profit margin was in line with comparable companies.
The company said it was being unfairly treated as a high-profit operation even though it operated as a manufacturer selling to a related distributor abroad.
However, the tribunal rejected Del Monte’s position, finding that the company failed to prove that its pricing reflected the economic reality of its operations in Kenya. The ruling agreed with the tax authority that Del Monte’s documentation did not adequately explain why the Kenyan business should earn only a modest return, given the scale of its activities.
“KRA in its pleadings stated that it had indeed sought the information from the registry records and therefore confirmed the ownership and relationship between the Del Monte and the enterprises engaging with it in cross-border transactions,” the tribunal stated.
KRA Challenges Del Monte’s Pricing and Offshore Transactions
The case arose from a KRA audit of Del Monte Kenya’s transfer pricing arrangements for the 2018 financial year.
KRA alleged that the prices charged to the Swiss affiliate were not at arm’s length, stating that they did not reflect what independent companies would charge, thereby shifting profits out of Kenya to a lower-tax jurisdiction.
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“That the Respondent erred in law by failing to consider the transfer pricing method Transactional net margin method (“TNMM”) using full cost mark-up (“FCMU”) and instead, opted for the deductive method,” read part of the tribunal.
Previously, Delmonte had applied a 4.83% markup to its costs when selling to DMI GmbH and argued that this was an appropriate return for its role in its growth.
Del Monte Kenya argued that the lender of a multi-billion-shilling intercompany loan, Del Monte Fund B.V., was owned by the ultimate Cayman Islands parent.
However, KRA presented evidence, including registry records, showing the lending entity was, in fact, wholly owned by the Swiss affiliate, DMI GmbH.
Therefore, the tribunal noted that Del Monte failed to provide official documentary evidence to counter KRA’s claim.
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