THE DETERMINANTS OF TRANSFER PRICING POLICIES BY MULTINATIONAL COMPANIES IN RWANDA A CASE STUDY OF AGRI-BUSINESS, ALCOHOLIC & BEVERAGES, AND MOBILE PHONES COMPANIES

Abstract

Transfer pricing has gained a lot of attention within the multinationals, however, studies on what determines transfer pricing policies in developing countries are scarce. In that view, this study assessed the driver factors of transfer pricing policies by multinational companies in Rwanda. In order to achieve the above objective, quantitative approach was used with the study population of 32 registered multinational companies in Rwanda that was considered as a sample. The univariate analysis was done using frequency tables, means, and standard deviation while for multivariate analysis multiple regression model was applied. With the univariate analysis, as a test of the legal factors, high withholding taxes on out sourced services showed that it influences the non-usage of arm’s length transfer pricing with a mean of 4.38 and standard deviation of 0.496, while heavy punishment to tax evaders showed the least influence with a mean score of 2.85 and standard deviation of 1.515. On the political factors, majority of the respondents indicated that the political environment influences transfer pricing (with a mean of 4.42 and standard deviation of 0.703) while under internal economic factors, most respondents indicated that efforts to have an increased market share of an affiliate positively impacts on the transfer pricing strategy (mean of 4.23, standard deviation 0.43). The external economic factors on the other hand showed that majority of the respondents stated that the existence of price controls in the country influenced transfer pricing policy as reflected by a mean score of 4.12 and standard deviation of 0.516, whereas on the informal cross-border trade many responded that the existence of informal cross-border trade had influence on transfer pricing with a mean of 4.27 and standard deviation of 0.452. The results from multiple linear regression using stepwise approach, showed that the internal economic factors of the firm, and the informal cross-border trade play a significant role in the selection of transfer pricing policies by the multinational companies in Rwanda. The study suggests to the Rwandan government to formulate legislative strategies or laws on transfer pricing so as to help the multinational corporations on their transfer pricing policies, which should also help the tax authorities to understand with ease the guiding principles behind the pricing policies taken by the multinational corporations operating in the country.