Regulatory measures by the government of Kenya in reducing transfer pricing manipulation by multinational corporations
Oriwo, Inviolata A
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In the present age, majority of cross-border trade is in the hands of multinational enterprises, who transact within different entities under common control. The prevalence of intra-group transactions has facilitated fixing their internal price at less or more than market value-a practice known as transfer pricing. One of the repercussions of the transfer pricing manipulation is tax avoidance, which is the most important issue in international taxation today. Transfer pricing manipulation has been responsible for enhancing private business gains, and thereby contributing to relative social impoverishment, by avoiding the payment of public taxes. The aim of this research work was to highlight thoroughly the practical problems with the current Kenyan regulations and approaches to taxation of multinational corporation and in particular the transfer pricing rules under the Income Tax Act Chapter 470, Laws of Kenya. This project examined, in detail, transfer pricing regulation, its role in tax avoidance and various counteractive measures which have been adopted by Kenya to tackle the problem. Data was collected by means of questionnaires administered on IS multinational firms. The results indicated similar rank ordering of the five weaknesses in the law when taken as a whole. The findings of the study show that there are loopholes in the regulatory regime which therefore allow firms to manipulate taxes and further that the tax authority lacks legal, technical know-how and administrative capacity to deal with the numerous transfer audits and queries revolving around cross border trade. The findings are that a significant number (85%) of respondents would want the government to develop more rules on transfer pricing in compliance with OECD requirements.