Abstract:
This study was undertaken to assess the extent to which transfer pricing was effectively used by multinational manufacturing companies operating in the Southern Gauteng region of South Africa. The target participants of the study traded their products across international borders and as such made use of transfer pricing in one way or the other to achieve strategic objectives. Scant research has been undertaken to analyse the degree to which transfer pricing can be used to effectively influence managerial performance. On the other hand there is a wealth of knowledge on the relationship between transfer pricing and taxation. In-depth review of literature showed that even though multinationals formulated their transfer pricing policies to target financial and managerial objectives, self-interest and outside influences tended to hinder the equitable realization of both types of objectives. The study therefore set out to establish whether this is true of Multinational corporations (MNCs) in Southern Gauteng and in the process answer questions about the procedure for formulating transfer pricing policies by these MNCs, the relationship, if any, between transfer pricing and profitability and the use of transfer pricing for performance enhancement and assessment.
The study made use of a mixed methods research methodology to collect and analyze data from 45 MNCs operating in the target geographical area. Of the 45 companies, 15 cooperated fully with the study. Data was collected via the use of questionnaires and follow-up face-to-face and/or telephonic interviews. Collected data was analysed using statistical methods including the Chi Square Test, standard deviation, frequency tables and the Kruskal-Wallis H test. The results from the questionnaire and interviews show that there is no universally appropriate Transfer Pricing Policies(TPP) which applies equally to all organizations in all circumstances. Firms are affected by different environmental factors while striving for tax-compliance and value creation. The fear of falling on the wrong side of tax laws is a major driving force behind transfer pricing policies of MNCs. As such other objectives that are managerial in nature become secondary and tend to be neglected if/when they conflict with the primary objective.
