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Effect of Transfer Pricing on Profit Shifting by Multinational Companies in Developing Countries: A Case of Rwanda

  • Daniel TwesigeEmail author
  • Faustin Gasheja
  • Jonas Barayendema
  • Alexis Uwamahoro
Chapter
  • 4 Downloads
Part of the Frontiers in African Business Research book series (FABR)

Abstract

Transfer pricing is the price between two related parties. Multinational companies have a tendency to shift their profits from the country where they operate to their home countries. The objective of this study is to examine the effects of transfer pricing on profit shifting by multinational enterprises in Rwanda. The study tests transfer pricing’s factors such as finance costs, intra-group transactions/services costs, and royalty expenses on profit shifting by multinational companies in Rwanda. The study is guided by the theory of optimal transfer prices, agency theory, and accounting theory. The study adopts a quantitative research design with a target population of 72 Multinational Enterprises registered in the large taxpayer’s offices. It collected data from financial statements and uses inferential statistics to ascertain the effects of transfer pricing on profit shifting. The study finds that multinational companies shift profits through royalties, finance costs, and intra-group services. The study concludes that a unit change in the independent variables influences total costs as well as taxable incomes. The study recommends that the Rwanda Revenue Authority (RRA) should come up with a clear law or legislation on transfer pricing.

Keywords

Profit shifting Transfer pricing Multinational companies Intra-group transactions Rwanda 

JEL Classification codes

M11 M13 M16 M38 

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Copyright information

© Springer Nature Singapore Pte Ltd. 2020

Authors and Affiliations

  • Daniel Twesige
    • 1
    Email author
  • Faustin Gasheja
    • 1
  • Jonas Barayendema
    • 1
  • Alexis Uwamahoro
    • 1
  1. 1.School of BusinessCollege of Business, University of RwandaKigaliRwanda

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