Customs Valuation As Transfer Pricing Tool, The Delmonte Case

Introduction and Case Overview

In a landmark double ruling on January 16, 2026, Kenya’s Tax Appeal Tribunal delivered two devastating blows to Delmonte Kenya Limited, dismissing both its appeals against transfer pricing assessments totaling KSh 6.7 billion. The coordinated judgments in Delmonte Kenya Limited v Commissioner Legal Services and Board Co-ordination (Tax Appeal E504 of 2025 and Tax Appeal E1263 of 2024) establish a powerful precedent with profound implications for multinational enterprises operating across Africa. These twin cases—covering the 2018 and 2019-2021 audit periods respectively—centered on the same fundamental question: Did Delmonte Kenya’s intercompany pricing for pineapple exports to its Swiss affiliate, DMI GmbH, comply with the arm’s length principle under Kenyan law?

Factual Background

• Corporate Structure: Delmonte Kenya, a subsidiary of the global Fresh Del Monte Produce group, operates extensive pineapple plantations and processing facilities within Kenya.
• Controlled Transactions: Both cases involved the same business model—exporting fresh and processed pineapples to Swiss affiliate DMI GmbH for European distribution.
• KRA Audit Findings: In both audits, KRA determined Delmonte had significantly underpriced exports, artificially shifting profits out of Kenya.
• Assessments Issued:

Case 1 (2018): KSh 1,760,937,221 assessment issued June 26, 2024

Case 2 (2019-2021): KSh 4,863,801,636 assessment issued December 20, 2024

Objection and Appeal: Despite separate objections, both cases followed similar paths to the Tribunal, culminating in coordinated judgments on the same day.

Transfer Pricing Methodologies

• Delmonte’s Uniform Position: In both cases, Delmonte applied the Transactional Net Margin Method (TNMM) with a Full Cost Mark-Up (FCMU) of 4.83%, maintaining its characterization as a low-risk contract manufacturer across all tax years.
• KRA’s Counter: The tax authority rejected this characterization in both audits, invoking Rule 7(f) of Kenya’s Transfer Pricing Rules to apply the deductive method (Customs Valuation Method 4).
• Tribunal’s Finding: The Tribunal delivered identical reasoning in both judgments: Delmonte’s portrayal as a simple contract manufacturer was inconsistent with the economic substance of its complex, value-creating operations in Kenya.

Tribunal Analysis & Findings

1. Functional Analysis and Economic Substance

• Finding: Across both cases, Delmonte performed substantial, value-creating functions in Kenya—including cultivation, quality control, inventory management, and shipping logistics—directly contradicting its claims of simplicity.
• Evidence : The Tribunal scrutinized similar evidence in both appeals: employee profiles, operational processes, and internal communications, consistently finding the company’s transfer pricing documentation did not reflect commercial reality.
• Legal Principle : The twin judgments reinforced that transfer pricing must be aligned with actual conduct and economic substance, not contractual arrangements or self-serving characterizations maintained across multiple years.

2. Selection of the Appropriate Transfer Pricing Method

• TNMM Appropriateness: In both rulings, the Tribunal determined TNMM was misapplied because Delmonte, not DMI GmbH, was the more complex entity. The “tested party” should have been the simpler Swiss distributor.
• Deductive Method Validation: Both judgments validated KRA’s use of the deductive method under Rule 7(f), establishing clear precedent for its application when taxpayers fail to provide adequate information for traditional methods.
• Methodology Application: The approved method involved the same approach in both cases: working backward from observable European retail prices, deducting appropriate margins and costs to arrive at arm’s length prices.

3. Burden of Proof and Documentation Requirements

• Statutory Burden: Both judgments emphasized the statutory burden of proof under Section 56(1) of the Tax Procedures Act rests squarely on the taxpayer.
• Documentation Failures: Delmonte failed this burden in both appeals by not providing crucial documentation, including DMI GmbH’s financial statements and robust evidence supporting functional allocations.
• Consequence of Non-Compliance: The documentation gaps in both cases empowered KRA to apply alternative methodologies, demonstrating that inadequate documentation consistently leads to unfavorable outcomes.

4. Related Party Transactions

• Intercompany Loans: Both judgments upheld KRA’s disallowance of interest deductions on loans from Del Monte Fund B.V., finding the arrangements lacked commercial rationality given DMI GmbH’s substantial trade receivables owed to Delmonte.
• Recharged Costs: Deductions for recharges from related parties were disallowed in both cases due to insufficient substantiating evidence.
• Corporate Structure Dispute: In both appeals, the Tribunal rejected Delmonte’s ownership structure claims, accepting KRA’s evidence that DMF B.V. was owned by DMI GmbH, not the ultimate parent company as Delmonte claimed.