application of transfer pricing as a strategic tool by multinational corporations...
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APPLICATION OF TRANSFER PRICING AS A STRATEGIC
TOOL BY MULTINATIONAL CORPORATIONS IN KENYA
BY:
JOHN NJOGU
A RESEARCH PROJECT SUBMITTED IN PARTIAL
FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD
OF THE DEGREE OF MASTER OF BUSINESS
ADMINISTRATION
SCHOOL OF BUSINESS
UNIVERSITY OF NAIROBI
OCTOBER 2013
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DECLARATION
This research project is my original work and has not been submitted for a degree in
any other university.
Signature: _______________________ Date: ___________
John Njogu
D61/63494/2010
This research project has been submitted for examination with my approval as
University of Nairobi supervisor.
Signature ___________________ Date: ________________
Supervisor
Prof. Peter K’Obonyo
School of Business
University of Nairobi
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ACKNOWLEDGEMENTS
I would like to thank God for the gift of life and health and for seeing me to this point
of completion of my final project. I would like to sincerely thank my family and
especially my parents for their support and encouragement throughout my school life
and during this programme and I wish to express my deep and sincere gratitude to my
supervisor, Prof. Peter K’Obonyo, for his support and guidance throughout this project.
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DEDICATION
This research project is dedicated to my loving parents whose foresight in education
and constant encouragement drove me to this level of education; and to my brother
James and my work colleagues as well for being a constant source of inspiration thus
far.
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TABLE OF CONTENTS
DECLARATION………………………………………………………….…................ II
ACKNOWLEDGMENTS…………………………………..……………….. ............ III
DEDICATION…………………………………………………………………........... IV LIST OF ABBREVIATIONS………………………………………..……. .............. VII
LIST OF TABLES…………………………………………………………… ......... VIII
LIST OF FIGURES………………………………………………………….... .......... XI
ABSTRACT…………………………………………………………...…. . … .............. X
CHAPTER ONE: INTRODUCTION…………………………………..….. ................ 1 1.1 Background to the study…………….…………………………………... ................ 1
1.1.1 The concept of strategy……………………….……………....……..… .............. 2
1.1.2 Transfer pricing……………………………….………….……...….…. .............. 2
1.1.3 Multinational companies in Kenya………….………………………... ............... 3
1.2 Research problem………………………………………………...…………............ 4
1.3 Conceptual motivation…………………………………………...….…..…. ............ 5
1.4 Research objectives…………………………………………………......….. ............ 6
1.5 Value of the study……………………………………………………..…… ............ 6
CHAPTER TWO: LITERATURE REVIEW……………………………...... ............. 7 2.1 Introduction………………………..…………………………….………..... ............ 7
2.2 Strategic tool concept………………………..………………….………..... ............ 7
2.3 Transfer pricing theories……………………………..……………….……. ............ 8
2.3.1 Economic theory…………………………………….……………........ ............. 8
2.3.2 Mathematical programming……………………….…………….……. .............. 9 2.3.3 Accounting theory……………………….………….………….…….. ............... 9
2.3.4 Organisation behavior theory………………………………….…… ................ 10
2.3.5 Strategic management theory………………….……………………. ............... 10
2.4 Application of transfer pricing as a capital and profit allocation…….................... 11
CHAPTER THREE: RESEARCH METHODOLOGY………………..…. ............. 13 3.1 Introduction……………………………………….…………….………... ............. 13 3.2 Research design…………………………………….………….…………. ............ 13
3.3 Population of the study………………………………….……….……….. ............ 13 3.4 Sampling………………………………………………….…….………… ............ 13
3.5 Data collection…………………………………………….….………...… ............ 14 3.6 Data analysis………………..…………………………………..………… ............ 14
CHAPTER FOUR: DATA ANALYSIS, RESULTS AND DISCUSSION. .............. 15 4.1 Introduction………………………………………..…………….………... ............ 15 4.2 General information……………………………...….………….…………. ........... 16
4.2.1 Department or area of expertise…………………..….……….……….. ........... 16 4.2.2 Position in the organization…………………………...…….………… ........... 17
4.2.3 Years of service with the company…………………….….………...… ........... 17 4.3 Corporate strategy…..…………………………………..………….……… ........... 18 4.3.1 Understanding of corporate strategy………….…………..….………... ........... 18 4.3.2 Strategy formulation process……………………………….…………. ........... 19 4.3.3 Department involvement in strategy formulation…………….……….. ........... 20
4.3.4 Role of parent company in strategy formulation………….……...…… ........... 20 4.3.5 Corporate objectives……………………….….……….…………....… ........... 21 4.4 Transfer pricing…..…………………………………..…………………… ............ 22 4.4.1 Understading of transfer pricing………………………..….……….…. ........... 22 4.4.2 Formulation of transfer pricing and objectives there on……….….….. ............ 22
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4.4.3 Application of transfer pricing as a strategy……………….……….… ............ 24
4.4.4 Transfer pricing and levels of sales and profits achieved……..…….… ........... 25 4.4.5 Transfer pricing as a measure of performance…………….…….….… ............ 26 4.4.6 Transfer pricing and level of intercompany transactions……..…….… ............ 26
CHAPTER FIVE: SUMMARY, DISCUSSION CONCLUSIONS AND
RECOMMENDATIONS……………………………………………….……. ............. 28 3.1 Introduction……………………………………….…………….….……... ............ 28 3.2 Summary…………………………………………….………….…………. ........... 28 3.3 Conclusions………………………………….……………..…….………. ............ .29
3.4 Limitations of the study…………………………………..…….………… ............ 30 3.5 Recommendations for further research…………….…………….………...… ....... 30
RFERENCIES………………………………………………………………… ............ 31
APPENDICES………………………………………………………………… ............ 35
APPENDIX 1: LIST OF COMPANIES……………………………………………35
APPENDIX 2: QUESTIONAIRE……………………………………………...….37
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LIST OF ABBREVIATIONS
MNCs: Multinational Companies
ITA: Income Tax Act
KRA: Kenya Revenue Authority
MNE: Multinational Enterprises
OECD: Organisation for Economic Co-operation and Development
TP: Transfer Pricing
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LIST OF TABLES
Table 4.1 Response rate................................................................................................ 15
Table 4.2 Application of transfer pricing as a strategy analysis................................... 25
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LIST OF FIGURES
Figure 4.1: Respondents background or area of expertise............................................ 16
Figure 4.2: Respondents positions in the organization................................................. 17
Figure 4.3: Respondents years of service..................................................................... 18
Figure 4.4: Corporate strategy...................................................................................... 18
Figure 4.5: Corporate strategy formulation.................................................................. 19
Figure 4.6: Department involvement in strategy formulation...................................... 20
Figure 4.7: Role of parent company in strategy formulation....................................... 21
Figure 4.8: Corporate objectives................................................................................. 21
Figure 4.9: Understanding of transfer pricing.............................................................. 22
Figure 4.10: Formulation of transfer pricing and objectives there on.......................... 23
Figure 4.11: Application of transfer pricing as a strategy............................................ 24
Figure 4.12: Transfer pricing and level of sales and profits achieved.......................... 26
Figure 4.13: Transfer pricing as a measure of performance......................................... 26
Figure 4.14: Transfer pricing and level of intercompany transactions......................... 27
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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.
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CHAPTER ONE: INTRODUCTION
1.1 Background of the study
With the pursuit of profits, cash flows, economics of scale and competitive
advantages most companies have chosen the route of globalization. According to
World Investment Report (2008) that there are approximately 79,000 multinational
enterprises (MNEs), with an average of 10 foreign affiliates each. Further, up to two
thirds of the world trade is taking place between related parties, including shipments
and transfers from parent companies to affiliates as well as trade between alliance
partners (Eden, 1998).
Globalization is the process by which businesses develop worldwide brands and
products which they supply across the world, and in which they employ labour in
many different countries. No country today can provide all of the resources necessary
to fully develop its economic potential and satisfy the needs of its population.
International trade has enabled countries to gain from the advantages of specialization
by exchanging its surplus goods for surpluses produced by other countries. Thus its
inhabitants can prosper from lower prices and higher living standards (Cole, 1996). In
order to enjoy the benefits of international expansion MNCs are expected to come up
with sound business strategies which enable them to fit in the environment whereby
they are able to overcome challenges presented by the global markets such costs
containment and pricing regulations and at the same time take advantage of
opportunities created by such markets including un-met demand and un-explored
markets. Without a clear strategy MNCs may never succeed in global markets
(Martinson, Englebrecht, & Mitchell, C, 1999).
Transfer pricing is one of the most important strategic activities involved in the
management of multiple business units within the firm. According to (Czinkota and
Ronkainen, 2007) a successful transfer pricing is a key element in the marketing mix
since it involves pricing of sales to members of the corporate family as well as pricing
within the individual markets in which the companies operates. A properly designed
transfer pricing strategy will enable management to make decisions congruent with
the firm‟s goals. It will also help a company achieve its corporate-wide goals
(Martinson, Englebrecht and Mitchell, 1999).
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1.1.1 The concept of strategy
Johnson and Scholes (2003) have defined strategy as the direction and scope of an
organisation over the long-term which achieves advantage for the organisation
through its configuration of resources within a challenging environment, to meet the
needs of markets and to fulfil stakeholder expectations. Business Dictionary, (2011)
has defined strategy as a long-term plan that is devised to help a company to gain a
competitive advantage over its rivals. Institute for Strategy and Competitiveness at
Harvard School of Business website has defined strategy as to how a company
competes in a particular business. It is concerned with how a company can gain a
competitive advantage through a distinctive way of competing.
A strategy is therefore a plan of action designed to achieve set and desired goals. It is
concerned with gaining (or being prepared to gain) a position of advantage over
adversaries or best exploiting emerging possibilities. As there is always an element of
uncertainty about future, strategy is more about a set of options normally referred to
as strategic choices than a fixed plan (Porter, 1980). For example, most MNCs have a
business objective of increasing growth and profitability in various countries by a
given percentage and achieve given percentage in overall growth and profitability.
1.1.2 Transfer pricing
Transfer pricing refers to pricing arrangement between related business enterprises
and applies to intra-company dealings such as sales or purchase of goods, provision
of services, sale or transfer of tangible and intangible assets, borrowing and lending
of money and any other transaction which may affect profit and loss. Transfer pricing
is concerned with pricing of intra-company trade. (Tang, 1997). According to
Abdallah (2004) a transfer price is defined as the price at which a business entity
transfers goods, intangible assets, or provide services to a related entity, such as a
parent company to a related entity, such as a subsidiary. The price is usually set and
used by an MNC to quantify the goods transferred or value the service rendered from
one subsidiary domiciled in a specific country to a subsidiary located in another
country.
Ordinarily, when independent enterprises are trading, prices of goods and services
provided as well as other commercial dealings are determined by market forces. On
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the other hand when trading is between related companies, commercial and financial
relations may not be directly affected by market forces. According to (Azemar and
Corcos, 2009) cross country differences in corporate income tax rates lead to MNC to
find strategies of reducing their tax liability through manipulation of transfer prices.
Manipulation of transfer pricing may occur by setting transfer price above or below
opportunity cost. This in turn shifts MNC profits from high-taxation jurisdiction to
low-taxation jurisdiction there by helping them to reduce overall tax payment and
increase after tax global profit. Multinational companies are required to come up with
cost estimates for performance and measurement purposes. This is done by allocating
costs and overheads to various functions and units of business. For affiliated MNC,
allocation mechanisms are highly subjective since they have considerable discretion
in allocating them to particular products/ services and geographical jurisdiction. Such
discretion can enable them to minimize taxes and there by swell profits by ensuring
that most profits are located in low tax jurisdiction (Ralph. and Reimers, 2009)
World over, tax revenue authorities have insisted on taxing a fair share of income of
MNC from their jurisdictions but where profits have been shifted to other
jurisdictions there may be no profits to tax. It is against this backdrop that tax revenue
authorities have always treated intercompany transactions with suspicion. Related
party transactions may be viewed by tax revenue authorities as efforts to manipulate
profits subject to tax (Freinschreiber and Kent, 2008). To avoid transfer pricing being
out of line with market rates tax revenue authorities have required MNC to set,
analyse, document and adjust charges between related parties to justify arm‟s-length
principal in their dealings (The Organization Economic Cooperation Development
Council Transfer Pricing Guidelines [OECD Transfer Pricing Guidelines], 2010).
1.1.3 Multinational corporations in Kenya
Business Dictionary, (2011) has defined MNC as an enterprise that has set its
operations in more than one country. It may have headquarters in one country (home
country) and subsidiaries in other countries. According to Investopedia Dictionary,
(2011) MNC refer to corporations that have facilities and assets in at least one
country other than home country. Porter (1980) has also defined MNC as a firm that
owns business operations in more than one country.
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According to Business Dictionary, (2011) there are four categories of MNC namely:
decentralized corporation with strong home country presence;
a global, centralized corporation that acquires cost advantage through
centralized production wherever cheaper resources are available; an international
company that builds on the parent corporation's technology or R&D, or a
transnational enterprise that combines the previous three approaches.
From a Kenyan perspective, MNCs can be classified in to large and medium
enterprises. Large enterprises include East Africa Breweries, James Finlay Ltd,
Unilever Kenya Ltd, Total Kenya Ltd among others and medium enterprises include
Schenker Limited, Ludin Kenya Ltd, Tarpo Industries East Africa, Beauty Line Ltd
and Westcon Africa among others. Further, MNCs in Kenya can also be classified
into inward and outward MNCs. Inward MNCs are foreign companies that have set
business operations in Kenya such as Standard Chartered Bank of Kenya, Barclays
Bank Limited which are subsidiaries of Standard Chartered Plc and Barclays PLC
respectively, companies incorporated and domiciled in the United Kingdom. Outward
MNCs on the other hand are local companies which have set up operations in foreign
jurisdiction such as Kenya Commercial Bank, Equity bank, Uchumi Supermarkets
and Sameer Africa Limited which are Kenyan based companies with subsidiaries in
Uganda and Tanzania. This study is concerned with large and medium enterprises as
well as inward and outward MNCs enterprises in Kenya.
1.2 Research problem
Transfer pricing has been viewed for many years as a compliance issue whereby tax
revenue authorities have legally required taxpayers to set, prepare, and document
transfer pricing documentation and submit to them (Muhoho, 2012) Additionally,
there are various theories on economics, accounting, taxation and finance aspect of
transfer pricing. They include: economics theory, mathematical programming,
accounting theory and organization behaviour theory. In economic theory, the firm is
viewed as a mini economy in which scarce resources are needed to be allocated and
transfer pricing is used as a mechanism to allocate these resources (Eccles, 1985).
Mathematical programming on the other hand has heavily borrowed from economics
theory. However, it has utilised opportunity cost as the basic concept of determining
transfer pricing rather than marginal cost employed by economic approach. Hence, its
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objective was to determine the transfer price that yielded the best results for the firm
as a whole (Eccles, 1985). Accounting theory sort to find out the transfer pricing that
would motivate divisional managers to make decision that benefit the firm as a whole
and finally, organization behaviour theory focused on impact of transfer pricing on
individuals and organizations (Kanodia, 1979; Herris, et al... 1982). It concluded that
the technical transfer pricing schemes could not work unless they fit in the
organization and accepted by managers as fair and neutral.
1.3 Conceptual motivation
Of late, transfer pricing has been viewed as a strategic tool that can enable MNC gain
competitive advantage (Muhoho, 2012). This is particularly brought by the fact that
various analysis including functional, risk, economic and bench marking analysis
have to be carried out to come up with an appropriate transfer price and the choice of
transfer price affects the total profit allocation among affiliates of MNC [OECD
Transfer Pricing Guidelines], 2010. There is also a limited literature on transfer
pricing and strategy. (Ngundi, 2012) examines transfer pricing management strategies
by MNC listed in the main investment segment of Nairobi Securities Exchange.
(Muhoho, (2012) examines implementation of transfer pricing as a business strategy
for MNCs. Additionally, strategic management theory (Swieringa and Waterhouse,
1982), has come up with four models from organization theory which attempts to
explain how the organization would handle transfer pricing problem. The models
include: the behaviour model (Cyert and March, 1963) where transfer pricing scheme
is thought to have evolved through goal setting process; the garbage model (Cohen
and March, 1963) where an organization was seen as an entity negotiating to solve
problems but constrained by choices available. Hence, the resultant transfer pricing
scheme would reflect that the problems were worked on in the context of choice; the
organization model which shows that the choice of transfer pricing scheme would be
seen as a means of legitimising past actions and the market and finally, the
hierarchy‟s model which sees transfer pricing as achieved by negotiation and
contracting.
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1.4 Research objectives
The objective of this study is to determine how MNCs operating in Kenya are
applying transfer pricing as a strategic tool.
1.5 Value of the study
The study hopes to benefit MNCs by enlightening them on the value of transfer
pricing as a strategic tool that can enable them to gain a competitive edge and not to
view it as just a compliance issue where by MNC are regally required to prepare and
submit it to tax revenue authorities. Additionally, given that there is little literature in
the field of transfer pricing and strategy, the study will contribute greatly by adding
knowledge which can be used by academicians, scholars and researchers as reference
point in examining transfer pricing and strategy.
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CHAPTER TWO: LITERATURE REVIEW
2.1 Introduction
This chapter examines existing knowledge and information on transfer pricing and
competitive strategy. The researcher looks at the findings of different authors and
presents the results of their studies. The chapter will specifically address application
of transfer pricing from various perspectives such as finance, economics and taxation
and specifically emphasise on application of transfer pricing as a strategic tool by
various MNCs.
2.2 The strategic tool concept
According to Oxford Advanced Learners Dictionary a tool is anything used to do or
achieve something. It is any item that can be used to achieve a goal, especially if the
item is not consumed in the process. The tools used in strategic management include:
SWOT (strength, weakness, opportunities and threat) analysis, Porter‟s five forces
analysis, PEST (political, economic, social and technical) analysis. The aim of this
study is to find out how transfer pricing is being used as a strategic tool by MNCs to
gain competitive strategy
According to Porter (2008), every firm competing in an industry have a competitive
strategy, whether explicit or implicit. The strategy may have been developed
explicitly through planning process or it may have evolved implicitly through
activities of various functional departments of the firm. The emphasis being placed in
strategic planning today in firms reflects the preposition that there are significant
benefits to gain through an explicit process of formulating strategy, to ensure that the
policies, if not the actions, of functional departments are co-ordinated and directed at
some common set of goals. As Porter (1980) noted, increased attention to formal
strategic planning has highlighted questions that have long been of concern to
managers. They include: drivers of the competition in the industry, what actions
competitors are likely to take, and the best way to respond to competitive pressure,
the best way for a firm to evolve itself to compete in the long run. Essentially,
developing a competitive strategy is developing broad formulas for how a business is
going to compete, what its goals should be, and what policies will be needed to carry
out those goals.
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2.3 Transfer pricing theories
There are five approaches to transfer pricing that evolved over time to address goal
congruence from a perspective of profit maximization within an organization. The
five approaches include: economic theory, mathematical programming, accounting
theory, organizational behavior theory and strategic management theory. The
economic, mathematical programming and accounting models sought to maximize
profits through determination of an optimal transfer price. The organizational
behavior and strategic management models provided theoretical approaches as to how
the organization might resolve conflict to negotiate a satisfactory transfer price and
bring about goal congruence. In addition, organizational behavior literature provided
direction using the motivational aspects of profits.
2.3.1 Economic Theory
In economic theory, the firm is viewed as a mini-economy in which scarce resources
need to be allocated. Just as in the general economy, prices are a mechanism to
allocate these scarce resources. The objective of the economic theory based
approaches is to find the transfer price that will lead the divisions, both buying and
selling, to choose production levels which maximize total firm profits (Eccles, 1985).
Persons within the organization are viewed as rational utility maximizers (Simon,
1978). Therefore, they hypothetically will not exhibit dysfunctional behaviors that
would lead to a misallocation of the scarce resources.
The literature in the economic theory based approach to transfer pricing is built upon
the Hirshleifer (1956) model. This was the first formal treatment of the transfer
pricing issue from the economics viewpoint (Eccles, 1985; Grabski, 1985). This
model assumed two profit centers: one was a manufacturing division and the other a
distribution division. The manufacturing division had no external market for its
product, whereas the distribution division had a competitive external market.
Hirshleifer (1956) then analyzed the problem under varying demand conditions and
concluded that when a perfectly competitive market exists for the intermediate
product, it should be transferred at the market price. Otherwise, the basic conclusion
yielded was to price along the marginal cost curve for intra-company transfers. This
conclusion held even when the assumption of no external market for the intermediate
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product was relaxed. This market was then examined under situations of both perfect
and imperfect competition (Eccles, 1985; Grabski, 1985).
2.3.2 Mathematical Programming
As in the economic theory approach, the objective of the mathematical programming
approaches was to determine the transfer price which yielded the best results for the
firm as a whole. However, the mathematical programming approach utilized
opportunity cost as the basic concept for determining transfer prices, rather than
marginal cost as employed by the economic approach. The procedures of this
approach introduced a pricing mechanism which determined the allocation of
resources when constraints on capacity exist or when multiple buying divisions exist
(Eccles, 1985). Most of the linear programming approaches to transfer pricing solved
for profit maximization as the primary constraint. Conversely, Harris, Kriebel and
Raviv (1982) viewed cost minimization as the vehicle to profit maximization. By
using cost minimization under varying levels of information, the authors proposed a
scheme that would penalize divisions for being in efficient. This scheme created a
situation in which transfer prices increase as divisions become more efficient forcing
the divisions to cut costs to maximize profits.
2.3.3 Accounting Theory
The transfer pricing approaches based on accounting theory had the same objective as
the economic theory and mathematical programming approaches: they sought to find
the transfer price that would motivate divisional managers to make decisions that
benefited the firm as a whole. The accounting theory approaches also used the same
assumptions about individual motivation and incentives as the preceding approaches.
The primary focus of this stream of literature was whether market price or some form
of standard variable cost should be used (Eccles, 1985). The first effort to apply
Hirshleifer‟s (1956) theory to accounting was made by Solomons (1965). He
prescribed five different transfer prices applicable to five different environmental
conditions (external markets and extent of internal transfers). The first of these
prescriptions was that market price was applicable when the external market was
highly competitive. Kaplan (1982) later agreed. The next four were for situations
when the external market was not highly competitive. They were for varying forms of
cost, dependent upon how important the transfer price issue was to the organization.
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The final prescription was for the situation when there was no competitive external
market for the product. He recommended mathematical programming to solve this
situation because the producing division was assumed to be operating under capacity
constraints. Also, it was assumed that most of the producing department‟s goods were
transferred to other departments. Kaplan (1982) would have categorized this
department as a cost center.
2.3.4 Organizational Behavior Theory
Grabski (1985) noted how unusual it was that only a small amount of research
focusing on organizational behavior theory and transfer prices had been published by
the mid-eighties. He stated that it was probably because the transfer pricing technique
was needed before the impact of the method on an individual and an organization can
be addressed. Unfortunately, it appeared that this viewpoint was quite prevalent
because very little research had been done in this area. Yet, most of the problems
pointed out in the complex mathematical models cited the inability to obtain fully
truthful information from divisional managers because their compensation schemes
are tied to divisional profits (Kanodia, 1979; Harris, et al., 1982; Ismail, 1982).
Therefore, the technical transfer pricing schemes could not work unless they fit the
organization, and are accepted by the managers as fair and neutral. Also, for these
models to work, divisional profits must be seen as an appropriate evaluator for
performance.
2.3.5 Strategic Management Theory
The perspective of the whole organization was taken by Swieringa and Waterhouse
(1982). They looked at four models of the organization from organization theory and
attempted to explain how these organization types would handle the transfer pricing
problem. The first model was the behavioral model where the organization was seen
as an entity that focuses on goals, expectations and choices (Cyert and March, 1963).
Goals emerge as a set of constraints which define acceptable performance. These
goals were arrived at by a bargaining process which mixes expectations and demands.
Organizations were also viewed as negotiating an environment to deal with
uncertainty. In this negotiated environment, the actions of participants were
“regularized” as well. Thus the organization learns and adapts over time as a result of
experiences and negotiating/bargaining activities. The transfer pricing scheme was
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thought to evolve through this organizational learning cycle. Division managers
negotiated acceptable transfer pricing rules which resulted from the goals of cost
savings, reinforcing the decentralized system, etc. (Swieringa and Waterhouse, 1982).
The second model was the Garbage Can Model (Cohen and March‟s, 1963). The
model saw organizations as negotiating to solve problems, but being constrained by
the collection of choices available. The nature of the choices made depended upon a
somewhat complicated intermeshing of a mix of all choices and solutions available,
all problems of the organization faces, and all outside demands. The process of
transfer price choice would reflect this complicated intermeshing. The resultant
transfer price scheme would reflect that problems were worked on in the context of
choice. What was chosen is what would be best for the situation selected from what
happens to be available.
The third model was the organizing model (Weick‟s, 1973) it was a fluid, dynamic
model of change. The organizing process was seen as cyclical. Members of the
organization were seen as creating, or enacting, the environment to which they adapt.
This is because retained interpretations largely determined what actions are responded
to and what meanings are given to those actions. Therefore, the choice of a transfer
pricing rule would be seen as a means of legitimizing past actions, as individuals only
have their retained interpretations by which shape their choices.
The last model was the markets and hierarchies model (Williamson, 1975).
Williamson saw two separate models of achieving cooperation in organizations. The
first was the markets model in which exchanges were achieved by negotiating and
contracting. Bound rationality (limited observational, language and computation
abilities of individuals) precludes individuals from foreseeing or anticipating all
possible courses of action and their contract implications. Williamson discussed how
individuals may create problems in this process due to self-interest, therefore may
make false claims. This has been evidenced in the economic and mathematical
programming literature on transfer pricing. Managers had a disincentive to reveal
truthful information because they would later be evaluated on this information. Thus
the negotiation process of determining a transfer pricing scheme in a markets model
organization could be costly due to time consumed “haggling and negotiating”. The
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hierarchies model by Williamson (1975) highlighted organizations which economize
on transactions costs by replacing a series of “market contracts” with a single
incomplete employment contract and common resource ownership. Cooperation is
encouraged in this model. Thus in a hierarchy, the best result for the organization as a
whole would be reflected in the transfer price scheme chosen (or in the decision to
purchase the products externally, if that happened to be the best result).
2.4 Application of Transfer pricing as a capital and profit allocation
Very often, MNEs use transfer prices in their inter-company accounts for purposes of
allocating capital and profits between headquarters and subsidiaries. For instance,
Insurance companies use intra-group reinsurance to reduce the amount of capital
which is required by the local regulator and to optimize capital management at a
group level (Bergen & Seymour, 2007). Other financial institutions like banks are
required by regulators in the countries they have set up their operations to have a
minimum amount of capital in order to operate. As such, a bank may seek to lower its
overall regulatory capital requirement by having a trader in a “high” capital country
trade a portfolio held in a “low” capital country. The trader in the “high” capital
country is able to trade the portfolio held in the “low” capital country because from
the counterparty‟s perspective, the bank as a whole has the capital necessary to
support the risks arising from its trading activities. Such cross-border use of capital
creates tax issues that impact directly on the profitability of each party (Howard,
Neighbour, Clair, Preshaw and Martens, 2006).
It is clear from the above literature review that transfer pricing is a strategic tool as
well as a finance, economics and taxation issue for MNCs. Therefore, MNCs are
required to be clear on their strategy and how transfer pricing may be used to realize
such strategies.
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CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Introduction
This chapter deals with the research methodology as the mode of achieving the
purpose of the study. It specifically highlights the research methods used in carrying
out the study in order to answer the research questions. The various methodological
issues discussed include research design, population, sampling design, data collection
and analysis.
3.2 Research Design
This study adopted a descriptive research design. A descriptive research design was
best for this study as it describes characteristics associated with the subject
population. Descriptive design allows one to establish relationships between variables
(Cooper and Schindler, 2003). It also allows collection of a large quantity of in-depth
data about the population being studied.
3.3 Population of the study
Since the focus of the study was on MNCs operating in Kenya, the population of
interest comprised all MNCs operating in Kenya in the various sectors of the
economy such agriculture, manufacturing, construction, tourism, financial services
amongst others both large and medium enterprises. According to (Economic Survey,
2011), there are over 250 MNCs operating in Kenya.
3.4 Sampling
The population was subsequently stratified according to the respective sectors in the
economy. Simple random sampling was applied within each stratum to arrive at a
sample of 40 MNCs where all the sectors were represented. The sample size was
informed by previous studies done on MNCs which used an average of 30 to 40
MNCs (Ernst and Young, 2008). In addition, this number was well above 10% which
is recommended by Mugenda and Mugenda (1999).
14
3.5 Data Collection
This study relied on both primary and secondary data. Primary data was obtained by
use of a self made questionnaire a copy of which is attached as Appendix I. The
questionnaire had four sections, section one was basically the introduction and stated
the objective of the study, section two contained general information regarding the
respondent and the organization, section three was the substantive section on strategy
and section four was on application of transfer pricing as a strategic tool. The target
respondents for the questionnaire were 40 Senior Managers and Managers working in
the respective MNCs since they had a better understanding of the corporate strategy
and implementation of transfer pricing as a strategic tool.
The main source of secondary data that was relied on this study was information on
the websites of the various MNCs. This helped in understanding MNCs mission,
vision and strategy. Other secondary data sources included Transfer Pricing policies
of MNCS, Articles, and Journals on transfer pricing which were principally used to
understand the MNCs being subject of this study.
3.6 Data Analysis
The collected data was cleaned, edited and entered into a computerized system to
enable carrying out of descriptive statistical analysis of the data. The data was coded
and presented in a thematic manner. Thereafter, the data was analysed using
descriptive statistics and in particular, used the mean as a measure of central
tendency. The data was then tabulated and the most appropriate charts, tables and
graphs chosen to present the findings. Tables were used to enable reading of specific
values while graphs were used to facilitate ease of data representation
15
CHAPTER FOUR: DATA ANALYSIS, RESULTS AND DISCUSSION
4.1 Introduction
This chapter presents the findings based on the data collected during the field work by
way of the questionnaire as a tool. The purpose of this study was to determine how
MNCs operating in Kenya are applying transfer pricing as a strategic tool.
The section therefore presents an analysis of the information obtained with a view to
fulfilling the research objectives as outlined in the study. 40 questionnaires were
distributed to the respondents of which 28 were completed. Thus the response rate
was 70%. The results are presented in the Table 4.1. The list of the companies from
which the responses were received are indicated in the attached Appendix 1.
Table 4.1: Response Rate
Sector Sample size Response
Male Female
Services and tourism 17 8 4
Agriculture 7 4 1
Manufacturing and assembly 16 8 3
Total 40 20 8
16
4.2 General information
The target respondents for the questionnaire were senior finance managers and
departmental heads working in the respective MNCs. The information sort included:
gender, department or area of expertise, position in the organization, years of service,
entities ultimate holders and countries which entities‟ ultimate holders are located.
4.2.1 Department or area of expertise
To find out the department or area of expertise of the respondents involved in the
study. It was found out that 38% of the respondents came from finance department
followed by sales and marketing at 22%, supplies and procurement 16%, human
resource 12% and research and development at 12%. The results are indicated on the
following Figure 4.1
Figure 4.1: Distribution of respondents by background or area of expertise
Target respondents of this study were senior managers and departmental heads of
MNCs since they have better understanding of transfer pricing and strategy.
38%
12%
12%
16%
22%
Finance
Sales & Marketing
Supplies &Procurement
Human resource
Research &Development
17
4.2.2 Positions of the respondents in the organization
It was found that 69% of the respondents were senior managers and departmental
heads and 31% of the respondents were junior managers. The results are indicated on
the following Figure 4.2.
Figure 4.2: Respondents’ position in the organization
The findings of the responses, senior managers and departmental heads seemed to
have a better understanding of both business strategy and transfer pricing and the
nexus between this two concepts.
31%
69%
Senior Managers
Managers
4.2.3 Years of Service in the company
The researcher sought to find out the years in service with the company of the
respondents involved in the study. It was found that 52% of the respondents had
between 6-10 years of service, 31% of the respondents had 11-15 years of service,
10% of the respondents had 0-5 years of service, 4% of the respondents had 16-20
years of service and 3% of the respondents had over 25 years of service. The results
are indicated on the following figure 4.3.
18
Figure 4.3: Respondents’ years of service
It appears from the results in the figure 4.3 that more experienced respondents had a
better understanding of transfer pricing and its application on corporate strategy.
3%10%4%
31%
52%
0-5 years
6-10 years
11-15 years
16 - 20 years
over 25 years
4.3 Corporate strategy
4.3.1 Understanding of corporate strategy
The researcher sort to find out whether respondents understood what corporate
strategy is. It was found that, 61% strongly agreed, 26% agreed, 7% remained neutral,
3% disagreed and 3% strongly disagreed. Most of the respondents had an
understanding of corporate strategy. The results are indicated on the following Figure
4.4.
Figure 4.4: Corporate strategy
From the responses in figure 4.4, it was observed that most respondents viewed
business strategy as the unifying theme that gives the direction of the organization
geared towards superior performance through establishing competitive advantage. In
addition, most respondents pointed out that strategy acts as a vehicle for
communication and coordination within organizations. Based on these responses it
was concluded that selected sample understand the concept of strategy and as such
their responses are reliable for purposes of this study.
19
3%3%7%
26% 61%
Strongly Agreed
Agreed
Neutral
Disagreed
StronglyDisagreed
4.3.2 Strategy formulation process
The respondents were required to indicate their understanding of strategy formulation
process for the company, As shown in figure 4.5, it was found that, 55% strongly
agreed, 28% agreed, 12% remained neutral, 3% disagreed and 2% strongly disagreed.
Most of the respondents were certain about strategy formulation process. The results
are indicated on the following Figure 4.5.
Figure 4.5: Corporate strategy formulation
From the analysis of the detailed response as evident in figure 4.5, most of the
respondents were able to briefly explain the strategy formulation process. Most of
them indicated that corporate strategy is not an event but rather a logical process
which entails a rational analysis of the organization where the current environment is
analyzed and objectives for the future are set hence necessitating revising of an
organization‟s mission and vision. Based on the analysis of the detailed responses it
was concluded that most of the respondents gave information that is reliable for
purposes of this study.
20
2%3%
12%
28%55%
Strongly Agreed
Agreed
Neutral
Disagreed
StronglyDisagreed
4.3.3 Department involvement in strategy formulation
To find out whether the respondents knew whether their departments were involved
in strategy formulation, it was found that, 58% strongly agreed, 28% agreed, 11%
remained neutral, 2% disagreed and 1% strongly disagreed. Most respondents knew
that their departments are involved in strategy formulation. The results are indicated
on the following Figure 4.6.
Figure 4.6: Departments involvements in strategy formulation
1%2%
11%
28% 58%
Strongly Agreed
Agreed
Neutral
Disagreed
StronglyDisagreed
4.3.4 Role of parent company in strategy formulation
The parent company played a significant role in strategy formulation. It was found
that, 44% strongly agreed, 23% agreed, 21% remained neutral, 10% disagreed and
2% strongly disagreed. Most of the respondents agreed that the parent company plays
21
a significant role in strategy formulation. The results are indicated on the following
Figure 4.7.
Figure 4.7: Role of parent company in strategy formulation
1%2%4%
28%
65%
Strongly Agreed
Agreed
Neutral
Disagreed
StronglyDisagreed
4.3.5 Corporate objectives
The respondents knew both short term and long term corporate objectives, it was
found that, 42% strongly agreed, 25% agreed, 14% remained neutral, 13% disagreed
and 6% strongly disagreed. Most of the respondents had a clear knowledge of the
company short term and long term objectives. The results are indicated on the
following Figure 4.8.
Figure 4.8: Corporate objectives
6%
13%
14%
25%
42%
Strongly Agreed
Agreed
Neutral
Disagreed
StronglyDisagreed
22
From the detailed responses, it was established that according to most the respondents
corporate objectives is an objective of medium and long term nature that aims either
at exploiting an opportunity or strength, or deals with a threat or a weakness facing
the organization. Most respondents indicated organizations objectives to include
increasing turnover, increasing market share globally, regionally and locally,
increasing profitability, cutting on costs to attain competitive advantage, enhancing
brand perception and quality assurance, increasing production, enhancing technology
and corporate social responsibility amongst others
4.4 Transfer pricing
4.4.1 Understanding of transfer pricing
As far as understanding transfer pricing is concerned, 35% strongly agreed, 26%
remained neutral, 20% disagree, 15% agreed and 4% strongly disagreed. Majority of
the respondents were certain about their understanding of transfer pricing. The results
are indicated on the following Figure 4.9.
Figure 4.9 Understanding of transfer pricing
4%
20%
26%15%
35%
Strongly Agreed
Agreed
Neutral
Disagreed
StronglyDisagreed
4.4.2 Formulation of transfer pricing and objectives corresponding
Attempt was made to find out whether the respondents understood how transfer
pricing between the company and related party is arrived at and objectives there on. It
was found that, 31% strongly agreed, 28% remained neutral, 20% disagree, 17%
agreed and 4% strongly disagreed. A fair number of the respondents understood how
23
the transfer price is set and its objectives. The results are indicated on the following
Figure 4.10.
Figure 4.10: Objectives of transfer pricing
As shown in the figure 4.10, most of the respondents suggested that transfer price is
set to achieve certain objectives such as achieving a given return, minimizing taxes,
recovering costs, supporting subsidiaries and promoting business growth amongst
others.
28%
20%
4%
31%
17%
Strongly Agreed
Agreed
Neutral
Disagreed
StronglyDisagreed
4.4.3 Application of transfer pricing as a strategy
To find out whether transfer pricing is applied as a strategy by MNCs, it was found
that, 35% strongly agreed, 26% agreed, 21% remained neutral, 13% disagreed and
5% strongly disagreed. Most of the respondents had a clear knowledge that transfer
pricing is applied as a strategy. The results are indicated on the following Figure
4.11.
24
Figure 4.11 Application of transfer pricing as strategic tool
16%
13%
5%
40%
26%
Strongly Agreed
Agreed
Neutral
Disagreed
StronglyDisagreed
From the detailed responses it was established that most respondents view transfer
pricing as a complex issue which involves a combination of planning and compliance
to meet operational and business objectives. Most respondents indicated ways which
transfer pricing is applied as a strategy to include internal objectives like motivating
subsidiary managers, monitoring performance of foreign subsidiaries and as a means
of achieving goal harmonization between subsidiary managers and the parent
companies. External objectives includes: application of transfer pricing as a means of
minimizing taxes and tariffs like corporate tax and duties on imports and exports , as
a means of controlling foreign exchange risks by minimizing foreign exchange losses,
as a cash management control tool and as a means of avoidance of foreign
government interference. Other strategies include increasing turnover and market
share and as a means of acquiring cheap source of debt and equity.
In order to establish the most common responses of application of transfer pricing as
a strategy, the detailed responses were further analysed as tabulated in table 4.2
below. From the analysis it was established that the most common application include
minimizing overall tax liability of MNC with a 57.14% frequency or popularity.
Other common applications included minimizing tax duties on imports and exports,
market penetration strategy, minimizing foreign exchange losses, motivating
subsidiaries managers, performance and measurement of subsidiaries and avoiding
exchange control restrictions with 50.00%, 42.86%, 39.29%, 38.22%, and 32.14%
respectively. The least common applications included risk analysis and bench
25
marking tool with 10.71% and 7.14% respectively. In addition, a few respondents
also indicated that transfer pricing may be used to support subsidiaries for example
providing stock and raw materials at a favourable price. The results are indicated on
the following Table 4.2.
Table 4.2: Application of transfer pricing as strategy analysis
Ranking Business objectives Total
population
Frequency Frequency as
percentage of
total
population
1 Minimizing tax
liability of MNC
28 16 57.14%
2 Minimizing tax duties
on imports and exports
28 14 50.00%
3 Market penetration
strategy
28 12 42.86%
4 Minimizing foreign
exchange losses
28 11 39.29%
5 Motivating subsidiary
managers
28 10 38.22%
6 Performance and
measurements of
subsidiaries
28 9 32.14%
7 Avoiding exchange
control restrictions
28 9 32.14%
8 Acquiring cheap
source of capital
28 5 17.86%
9 Functional and risk
analysis tool
28 3 10.71%
10 Benchmarking tool 28 2 7.14%
The main objective of the study is to determine how MNCs in Kenya are applying
transfer pricing as a strategic tool.
4.4.4 Transfer pricing and level of sales and profits achieved
The respondents were asked to state whether transfer prices affect sales level and
profit achieved by the company. The results are as per figure 4.12. It was found that,
35% strongly agreed, 27% agreed, 18% remained neutral, 13% disagreed and 7%
strongly disagreed. Majority of the respondents were certain that transfer prices affect
sales level as well as profitability. The results are indicated on the following Figure
4.12.
26
Figure 4.12: Transfer pricing and level of sales and profits achieved
18%
13%
7%
35%
27%
Strongly Agreed
Agreed
Neutral
Disagreed
StronglyDisagreed
4.4.5 Transfer pricing as a measure of performance
As to whether transfer pricing is used as a measure of performance. 26% of the
respondents strongly agreed, 24% agreed, 32% remained neutral, 12% disagreed and
6% strongly disagreed. Majority of the respondents were not aware that transfer
pricing is used as a measure of performance for departmental heads. The results are
indicated on the following Figure 4.13.
Figure 4.13: Transfer pricing as a measure of performance
32%
12%
6%
26%
24%
Strongly Agreed
Agreed
Neutral
Disagreed
StronglyDisagreed
4.4.6 Transfer pricing and level of intercompany transactions
To find out whether the respondents understood that transfer pricing set by the
company affect the level of other intercompany transactions with related non-resident
27
companies, it was found that, 28% strongly agreed, 23% agreed, 30% remained
neutral, 13% disagreed and 6% strongly disagreed. Majority of the respondents
understands that transfer pricing affects level of intercompany transactions with
related non-resident companies. The results are indicated on the following Figure
4.14.
Figure 4.14: Transfer pricing and level of inter-company transactions
6%
13%
30%23%
28%
Strongly Agreed
Agreed
Neutral
Disagreed
StronglyDisagreed
51% of the respondents agreed that apart from buying and selling transactions
between resident corporate with non resident related corporate, other transactions
affected by transfer pricing include: provision of marketing and logistics support, sale
and lease of tangible and intangible assets, borrowing of money to capitalise the
business among others.
28
CHAPTER FIVE: SUMMARY, DISCUSSION, CONCLUSION AND
RECOMMENDATION
5.1 Introduction
This chapter addresses the results and findings of application of transfer pricing as a
strategic tool for MNCs operating in Kenya. The findings are outlined according to
specific objectives of the study. The findings are based on the responses from the
questionnaires filled and information gathered on the research questions. The
researcher provides a discussion on the findings of the research as compared to the
findings in the literature review based on the specific objectives.
5.2 Summary
The objective of this study was to find out how MNCs operating in Kenya are
applying transfer pricing as a strategic tool. The research adopted a descriptive
research design. The population comprised of 40 MNCs operating in Kenya. The
study adopted a stratified and random sampling technique to increase statistical
efficiency and provide adequate data for analyzing the various sub-populations. Data
was collected using questionnaires, edited and analyzed statistically for better and
reliable results. The study used descriptive statistics using statistical indexes such as
frequency, percentage and mode. In using inferential statistics, the data was analyzed
using correlation analyses, which were vital in making sense of the data. The
analyzed data was presented in the form of tables, charts and figures according to the
research questions.
The objective of the study was to find out whether MNCs in Kenya apply transfer
pricing as a strategic tool. The study revealed that in deed most MNCs in Kenya are
using transfer pricing as a strategic tool. Most respondents indicated ways which
transfer pricing is applied to include achieving internal objectives like motivating
subsidiary managers, monitoring performance of foreign subsidiaries and as a means
of achieving goal harmonization between subsidiary managers and the parent
companies. External objectives includes using transfer pricing as a means of
minimizing taxes and tariffs, as a means of controlling foreign exchange risks, as a
cash management control tool and as a means of avoidance of foreign government
interference. Other strategies include increasing turnover and market share and being
29
applied as a means of acquiring cheap source of debt and equity. In addition, a few
respondents also indicated that transfer pricing may be used to support subsidiaries
for example providing stock and raw materials at a favourable price.
Further, to find whether transfer pricing is used as a measure of performance for
departmental heads, it was found out that majority of respondents i.e. above 50%
were not aware that the transfer pricing is used as a measure of performance and to
find out whether transfer pricing affects sales and profits volumes as well as other
inter-company transactions. It was found out that majority of respondents were in
agreement.
5.3 Conclusions
In contrast to a purely finance, economic and tax-driven mechanism, transfer pricing
can be considered as a tool for advancing MNCs strategy in Kenya. Results indicate
that executives are not solely focused on finance, economics and taxation issues as
the primary objective of transfer pricing.
MNCs in Kenya employ transfer pricing to assist in achieving corporate strategy and
other corporate objectives as well. In general, executives perceive that transfer pricing
does influence measures of corporate performance. This is supported by the finding
that transfer pricing also contributes toward achieving objectives. Among the
business strategies that MNCs seek to achieve through transfer pricing include market
penetration strategies including increasing turnover and market share, tax
minimization strategies, cost of capital as well as cash flow strategies. The study
further revealed that such strategies are achieved by adjusting the transfer price
between related parties which is possible due to common control between related
parties.
30
5.4 Limitation of the study
This study is limited to the extent that it concentrated on inward MNCs largely
because Kenya is a developing country and as such it has more inward MNCs as
opposed to outward MNCs. With revamping of the East Africa Community it is
expected that more outward MNCs will come up, a study with a balanced number of
inward and outward MNCs would provide better and balanced analysis.
Some respondents opted to remain neutral to some questions in the questionnaire
while other completely refused to respond this study due to the sensitive nature of the
information sought, some respondents indicated that pricing decision are secret as it
comprises companies competition strategies while others feared that the information
may find it ways with the KRA and thus get victimized.
This study was also limited by way resources such as time. Due to time constraints
the researcher was not able follow up on all the respondents and especially where
responses were not forth coming after severally follow up calls and email reminders.
5.5 Recommendation for further research
The transfer pricing environment is constantly changing, in terms of both risks and
opportunities. MNCs therefore need to ensure they stay up-to-date with the latest
developments and transfer pricing best practices. In doing so, they can optimize the
opportunities to apply transfer pricing as strategic tool and at the same time reduce
their global effective tax rate and ensure they remain compliant with changing
guidelines and regulations, while at the same time minimizing the risks associated
with a transfer pricing audit.
MNCs should enhance their understanding of what transfer pricing means and how
transfer pricing is applied as a strategic management tool. Further, the employees of
MNCs should understand the nexus between transfer pricing and strategy.
In addition, the researcher proposes that future researchers should focus on examining
various ways of managing transfer pricing risks and challenges especially in
emerging markets and develop on the limited theoretical framework on the topic.
31
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35
APPENDICIES
APPENDIX I: LIST OF MULTINATIONAL CORPORATION SELECTED
FOR STUDY
SERVICES AND TOURISM
1. SIEMENS LIMITED
2. WESTCON AFRICA (KENYA) LIMITED
3. TARPO INDUSTIES LIMITED
4. ERICSSON LIMITED
5. ESSAR TELECOM KENYA LIMITED
6. AIG KENYA CO LTD
7. BARCLAYS BANK
8. KENYA COMMERCIAL BANK
9. STANDARD CHARTERED
10. EQUITY BANK
11. TOTAL KENYA LIMITED
12. DHL WORLDWIDE EXPRESS KENYA LIMITED
13. KENOL KOBIL
14. AMIRAN COMMUNICATIONS LIMITED
15. SDV TRANSAMI KENYA LIMITED
16. VINTAGE AFRICA LIMITED
17. TPS SERENA EAST AFRICA LIMITED
AGRICULTURE
1. JAMES FINLAY LIMITED
2. HOMEGROWN KENYA LIMITED
3. SYNGENTA EAST AFRICA LIMITED
4. BEAUTY LINE LIMITED
5. AFRI VENTURES KENYA LIMITED
6. GLOBAL COMMODITIES EAST AFRICA LTD
7. AMIRAN KENYA LIMITED
MANUFACTURING AND ASSEBLY
1. DT DOBIE (EA) LIMITED
2. TOYOTA EAST AFRICA LIMITED
3. GENERAL MOTORS EAST AFRICA LIMITED
4. BEIERSDORF E A LTD
5. PZ CUSSONS E.A LTD
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6. PROCTER & GAMBLE (EA) LTD
7. NESTLE FOODS KENYA LIMITED
8. EAST AFRICAN CABLES LTD
9. EAST AFRICA PACKAGING INDUSTRIES LTD
10. SCHENKER LIMITED
11. UNILEVER KENYA LIMITED
12. BATA SHOE COMPANY
13. GLAXOSMITHKLINE LIMITED
14. HENKEL CHEMICALS EAST AFRICA LIMITED
15. SAMEER AFRICA LIMITED
16. COCA COLA EAST AND CENTRAL AFRICA
Source: Nairobi stock exchange
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APPENDIX 2: QUESTIONAIRE
“APPLICATION OF TRANSFER PRICING AS A STRATEGIC TOOL BY
MULTINATIONAL CORPORATIONS IN KENYA”
SECTION I: INTRODUCTION AND OBJECTIVE
This questionnaire is prepared to seek your assistance in providing information on
application of transfer pricing as a strategic tool. This will assist me in conducting my
research project in partial fulfilment of the requirements for the Degree of Masters of
Business Administration. The information obtained will only be used for academic
purposes and shall be treated in confidence.
SECTION II: GENERAL INFORMATION
Personal Information:
1. Name:…………………………………………………………………………..
2. Gender: Male ( ) Female ( )
3. Name of Company/Entity:……………………………………………………..
4. Department or area of expertise…………………………………………………
5. Job level/ position……………………………………………………………….
6. Years of service with the company:
0 – 5 ( ) 16 – 20 ( )
6 – 10 ( ) Over 25
11 – 15 ( )
7. Company/Entity ultimate holding company:……………………………………
8. Country in which the company/entity‟s ultimate holding company is located
…………………………………………………………………………………
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9. Country (ies) in which the company/entity‟s other related parties are located attach
a (Attach a separate schedule if need be…………………………………...
10. Does your organization trade with its related entities? …….. if yes, list down the
trade items …………………………………………………………………….
SECTION III: CORPORATE STRATEGY
Please indicate the extent to which you agree with the following statements by using a
scale of 1 to 4 where 1= strongly disagree, 2= disagree, 3= neither agree nor disagree,
4=agree, 5 = strongly agree. Tick (√) which best describes your opinion of the
statement in reference application of transfer pricing. In addition, please provide brief
comments on the additional questions based on your response to the statement.
1. I understand what strategy is:
Strongly
Disagree
Disagree Neutral Agree Strongly
Agree
Provide a brief description of what strategy is ........................................................
2. I can describe the process of strategy formulation for the company:
Strongly
Disagree
Disagree Neutral Agree Strongly
Agree
Provide a brief description of strategy formulation process....................................
3. I know that the department I am working for is involved in strategy formulation:
Strongly
Disagree
Disagree Neutral Agree Strongly
Agree
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4. The parent company plays a significant role in strategy formulation:
Strongly
Disagree
Disagree Neutral Agree Strongly
Agree
5. I know the company‟s long term and short term objectives:
Strongly
Disagree
Disagree Neutral Agree Strongly
Agree
List the long term and short term objectives:...........................................................
SECTION IV: TRANSFER PRICING
Please indicate the extent to which you agree with the following statements by using a
scale of 1 to 4 where 1= strongly disagree, 2= disagree, 3= neither agree nor disagree,
4=agree, 5 = strongly agree. Tick (√) which best describes your opinion of the
statement in reference application of transfer pricing. In addition, please provide brief
comments on the additional questions based on your response to the statement.
1. I understand what transfer pricing is:
Strongly
Disagree
Disagree Neutral Agree Strongly
Agree
2. I understand how the transfer pricing between the company and related party is
arrived at and objectives there on:
Strongly
Disagree
Disagree Neutral Agree Strongly
Agree
State the objectives...................................................................................................
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3. Transfer pricing is applied as a strategic tool in the company:
Strongly
Disagree
Disagree Neutral Agree Strongly
Agree
Describe ways in which transfer pricing is applied................................................
4. Transfer prices affect the sales level and profits achieved by the company:
Strongly
Disagree
Disagree Neutral Agree Strongly
Agree
5. Transfer prices are used as a measure of performance for departmental heads:
Strongly
Disagree
Disagree Neutral Agree Strongly
Agree
6. Transfer prices set by the company affect the level of other intercompany
transactions with related non-resident companies:
Strongly
Disagree
Disagree Neutral Agree Strongly
Agree
Indicate the other transactions..................................................................................
THANK YOU FOR YOUR TIME AND CONTRIBUTION