As 2025 comes to a close, businesses in Kenya must turn their focus to the significant tax and regulatory changes set to take effect from 1 January 2026. These amendments, introduced primarily through the Finance Act 2025 and new Kenya Revenue Authority (KRA) directives, will reshape tax compliance, transfer pricing, cash flow planning, and digital reporting across sectors.
This update outlines the most critical developments and practical steps businesses should take to prepare.
1. Introduction of Advance Pricing Agreements (APAs)
One of the most impactful reforms under the Finance Act 2025 is the formal introduction of Advance Pricing Agreements (APAs) under Section 18G of the Income Tax Act.
What is an APA?
An APA is a pre-agreed transfer pricing arrangement between a taxpayer and KRA that determines the appropriate pricing methodology for related-party transactions in advance.
Key Features:
- Valid for up to five consecutive years
- Covers transactions with:
- Related resident persons
- Entities in preferential tax regimes
- Reduces exposure to future transfer pricing audits and disputes
Who Should Consider an APA?
- Multinational groups
- Businesses with cross-border related-party transactions
- Family-owned groups with multiple related entities
- Companies operating in Special Economic Zones (SEZs)
Businesses should begin reviewing their transfer pricing policies now, ahead of the 2026 implementation.
2. Expanded Powers to Waive Penalties from iTax System Errors
From January 2026, the KRA Commissioner will have enhanced authority to waive penalties and interest arising from failures caused by electronic tax system errors.
Why This Matters:
- Taxpayers can formally challenge penalties caused by system glitches
- Greater fairness where non-compliance was beyond the taxpayer’s control
- Reduced financial exposure from iTax technical failures
This amendment introduces a long-awaited compliance safeguard for taxpayers affected by system downtime or errors.
3. New KRA Validation Rules Using eTIMS and Third-Party Data
KRA will intensify validation of income and expenses using:
- eTIMS/TIMS
- Withholding tax data
- Import and customs records
Key Implications:
- Only expenses supported by valid electronic tax invoices will be deductible
- Invoices must be correctly linked to the buyer’s PIN
- Non-compliant invoices risk expense disallowance
Businesses must ensure suppliers are eTIMS-compliant and internal systems are aligned.
4. Turnover Tax (TOT) Clarification
KRA has clarified that Turnover Tax (TOT) applies to businesses with annual gross turnover between:
KES 1,000,000 – KES 25,000,000, taxed at 1.5% of gross sales
Businesses within this threshold should reassess their classification and exposure ahead of FY 2026.
5. Tax Loss Carry-Forward Limited to Five Years
The Finance Act 2025 reintroduced a five-year cap on tax loss carry-forwards, with possible extension only at the Cabinet Secretary’s discretion.
Planning Considerations:
- Identify expiring tax losses
- Strategically time profit recognition
- Reassess long-term investment structures
This change significantly impacts capital-intensive sectors.
6. Digital Economy & Employee Tax Changes
Other notable amendments already in effect include:
- 10% excise duty on virtual asset transaction fees
- Increase in tax-free per diem allowance from KES 2,000 to KES 10,000
- Extended VAT refund timelines:
- 120 days (without audit)
- 180 days (with audit)
These changes affect fintechs, employers, and businesses reliant on VAT refunds.
7. Minimum Top-Up Tax (Proposed for 2026)
KRA has proposed a Minimum Top-Up Tax calculated using:
- 9.4% of employee costs
- 7.4% of asset values
If standard corporate tax falls below this threshold, businesses may be required to top up.
Businesses with high assets or payroll but low profits should model their exposure early.
Preparing Your Business for 2026
To stay compliant and competitive, businesses should:
- Conduct a pre-compliance tax and transfer pricing review
- Strengthen cash flow planning for delayed VAT refunds
- Update transfer pricing documentation
- Evaluate the strategic value of APAs
- Engage professional advisors early
How UHY Kenya Can Support You
At UHY Kenya, we help businesses navigate complex regulatory transitions with clarity and confidence. Our Audit, Tax, and Advisory teams provide:
- Transfer pricing advisory & APA support
- Tax compliance and dispute resolution
- Strategic tax planning
- Pre-audit risk assessments
- Cash flow and VAT advisory
Plan Ahead. Stay Compliant. Turn Regulation into Opportunity.
📞 Contact UHY Kenya
📧 mmbuthia@uhy-ke.com
📍 Rainbow Towers, 6th Floor, Muthithi Road, Westlands, Nairobi
🌐 www.uhy-ke.com
A member of UHY International – a global network of independent audit, tax, and advisory firms.
