Challenges Affecting Implementation of Transfer Pricing Policies by Multinational Companies in Kenya

Abstract

The objective was to examine the challenges affecting implementation of transfer pricing policies by multinational companies in Kenya. The study specifically sought to determine the extent to which compliance costs, threat of double taxation, loss of revenue and the existing regulations affect implementation of transfer pricing policies by multinational companies in Kenya. The study was guided by theory of optimal transfer prices, agency theory, and modern financial theory. The study adopted a descriptive research design. The target population was senior finance officers, one from each of the 213 MNCs in Kenya. The study adopted a formula by Cochran to calculate the sample size. The sample size of the study was 137 senior finance officers in MNCs. The study collected primary data though a questionnaire which had closed questions. The researcher administered the questionnaire through drop and pick later method. The developed questionnaire was checked for its validity and reliability through pilot testing. Reliability of the questionnaire was tested by Cronbach’s alpha test with the and a co-efficient of above 0.8 was achieved which implied that the instrument was sufficiently reliable for the measurement. The data was analyzed using descriptive and inferential statistics. The descriptive statistics included frequency distribution tables and the means, standard deviation and measures of relative frequencies. The inferential statistics included a multiple regression model which established the relationship between variables. The analyzed quantitative data was presented using tables, charts and graphs. The study found out that there was a negative and significant regression relationship between compliance costs and implementation of transfer pricing policies in MNCs in Kenya. There was a positive and significant relationship between threat of double taxation and implementation of transfer pricing policies. The study also found out that there is a positive and significant relationship between regulations and implementation of transfer pricing policies. The study concludes that an increase in compliance costs such as those associated with transfer pricing audits in order to comply with the regulations and documentation of transfer pricing policy negatively affects implementation of transfer pricing policies in MNCs. It can also be concluded that when MNCs are exposed to threats of double taxation, for instance in cross-border transfers of goods and services by tax authorities of different jurisdictions; the companies will tend to implement transfer pricing policies such as use of Arm's length principle so to minimize the possibility for double taxation. It can also be concluded that the existing TP legislation lack clarity and give rise to uncertainty and they tend to be a hindrance to implementation of transfer pricing policies by MNCs in Kenya. The study recommends that Kenyan government should come up with a clear law or legislation on transfer pricing. The study also recommends that MNCs should pay more emphasis on the implementation of transfer pricing policies to avoid such penalties. The MNCs should aligned their business objectives to the Kenyan transfer pricing regulations to avoid any legal penalties.