Effects of Transfer Pricing on Financial Performance of Multinational Firms Listed on the Nairobi Securities Exchange

Transfer pricing has become a global issue that multinational firms and revenue authorities need to manage. There is a general feel by the revenue authorities that multinational firms transfer profits from jurisdictions of higher tax rates to jurisdictions with low tax rates without moving corresponding economic activity, assets, risks or functions to minimise on their overall effective tax rate (Wong et al., 2011). Multinational firms, on the other hand cite reasons for engaging in transfer pricing to include the need to benefit from group synergies through establishing shared service cost centres and hence improve on firm’s performance. This transfer pricing issue has therefore led to revenue authorities conducting transfer pricing audits on multinational firms and performing resultant transfer pricing adjustments. The principal objective of this study was to understand the effects of transfer pricing on financial performance of multinational firms listed on the Nairobi Securities Exchange. Research design used for purposes of this research was descriptive design. Target population comprised of 65 firms listed on the Nairobi Securities Exchange. Purposive sampling was used to select 10 multinational firms which are engaged in related party transactions. Data was collected from signed and published audited financial statements for a five-year period (2013-2017). Correlation analysis findings indicated a positive moderate correlation between the number of expense and revenue related transactions (r = 0.433). The findings also indicated an inverse relationship between expense related transactions and operating margin, and a direct correlation between revenue related transactions and operating margin. Regression analysis results indicated that related party transactions could only explain 19.2% of variation in profit margins. The findings also indicated that the number of revenue and expense related transactions does not have an effect on a firm’s performance financial performance: However, the amount of revenue ...