The Effect of Transfer Pricing on Tax Planning for Multinational Companies in Kenya

Abstract

Taxation issues in Kenya have been a hot topic both in the government and in the private entities. Multinational organizations are operating in an environment of unprecedented complexity. The rising volume and variety of intercompany transactions and transfer pricing regulations, accompanied by increased enforcement activities worldwide have made transfer pricing a leading risk management issue for global businesses. The government on one hand, is tirelessly working hard to uncover all the revenue leakage avenues devised by various businesses to shield themselves from paying taxes while the private sector on the other hand are aggressively engaging the knowledge of the experts in the effort to discover and embrace strategies to protect their revenues from heavy taxation. It emerges that whereas the Kenyan taxpayer diligently bears the heavy tax burden, foreign multinationals appear to get away with payment of taxes with ease. On that note, the Kenya Revenue authority is day in day out working so hard to come up with ways of raising revenues to meet the expenditure demands of the state and to hit the Budget targets. Transfer pricing is a 20th century phenomenon which came as result of the 2005 Unilever case which evidenced a lack of the transfer pricing Rules. A transfer price is a price charged by a Company supplying goods/ Services to another related party or company. The related party can be a subsidiary, an associate or a joint venture. The objective of this study was to establish the effect of transfer pricing on tax planning for Multinational companies in Kenya. The study adopted a descriptive study. The study used primary data gathered from a sample of Multinational companies based in Nairobi and its environs. The data was analyzed using SPSS providing various parameters to show the strength of the relationship between the variables under observation. In summary, the results show indirect evidence that transfer pricing is one of the determinants of tax planning activity among others in MNCs. The study shows a positive relationship between the dependent (tax saved) and independent variables (transfer price adopted & the number of subsidiaries a multinational has). The outcome of this statistics is consistent with earlier studies of Kar and Cartwright-Smith (2008) that have linked transfer pricing practices with tax avoidance. The recommendations of this study are that Transfer pricing presents many tax, legal and operational challenges. To many taxpayers the magnitude of uncertainties – including the potential commitment of management time to successfully defend a transfer pricing examination – is not an acceptable business risk therefore, The Kenya Revenue Authority should focus more on various tax planning mechanisms adopted by Multinational companies to avoid the revenue leakages of the state. In general conclusion transfer pricing has an effect on tax planning of companies.