Application of Transfer Pricing as a Strategic Tool by Multinational Corporations in Kenya

Abstract

Transfer pricing has been viewed for many years as a compliance issue whereby MNCs are legally required to prepare, document and file with tax revenue authorities. Additionally, most authors have written on economics, accounting, taxation and finance aspect of transfer pricing. Notable among them are Eccles (1985) and Hirshleifer (1985). However, of late, transfer pricing has been viewed as a strategic tool that can enable MNCs to gain competitive advantage. Additionally, there is little literature on transfer pricing and strategy. The objective of the study was to find out how MNCs operating in Kenya were applying transfer pricing as a strategic tool. The study adopted descriptive research design which enabled to describe characteristics associated with the subject population. It was found out that transfer pricing was applied to achieve internal objectives such as motivating subsidiary managers, monitoring performance of foreign subsidiaries and as a means of achieving goal harmonization between subsidiary managers and parent companies. External objectives included application of transfer pricing as a means of minimizing taxes and duties, as a means of controlling foreign exchange risks, as a cash management tool and as a means of avoidance of foreign government interference. It was revealed that in contrast to a purely finance, economics and tax driven mechanism, transfer pricing can be considered as a tool for advancing MNCs strategies in Kenya. Results indicated that executives were not solely focused on compliance, finance, economics and taxation issues as primary objectives of transfer pricing. It was recommended that future researchers should focus on examining various ways of managing transfer pricing risks and challenges especially in emerging markets.