TUGAS AKUNTANSI INTERNASIONAL "META ANALISIS"

NAMA KELOMPOK :

• ARUM SETIAWATI   21212176
• ANDIKO WIJAYA     20212795

KELAS :

                 4EB13

Congruence of Competitive Advantage and Transfer Pricing: A Study on Selected MNCs Operating in Bangladesh

Asian Accounting and Auditing Advancement, Volume 5, No 2 (2015)

Md. Nur-E-Alam Siddique, Alim Al Ayub Ahmed

INTRODUCTION

As the matter of profits, cash flows, economies of scale and competitive advantages most companies have preferred the way of globalization. Globalization is the procedure by which companies develop worldwide brands and products that they sell across the countries of the world, and in which they employ labor. At present no country can supply all of the resources required to fully develop its economic prospect and satisfy the need and want of its population. International trade has facilitated countries to gain from the benefits of specialization by exchanging its surplus products for surpluses produced by other countries. So, its inhabitants can prosper from lower prices and higher living standards (Cole, 1996). In order to enjoy the advantages of international expansion MNCs are anticipated to come up with effective business strategies that make them able to fit in the situation whereby they are capable to face challenges offered by the global markets such as tax, costs and pricing conventions. They also can take the advantage of opportunities created by those markets consisting of un-met want and un-explored markets. MNCs may never succeed in global markets without a clear strategy. (Martinson, Englebrecht, & Mitchell, C, 1999). A planned transfer pricing strategy will enable management to make decisions harmonious with the firms’ objectives. It will also help a company to achieve its corporate-wide goals (Martinson, Englebrecht and Mitchell, 1999). Transfer pricing is one of the most significant strategic tools involved in the management of multiple business units within the firm. According to (Czinkota and Ronkainen, 2007) an effective transfer pricing is a key element in the marketing mix since it involves pricing of sales to members of the corporate family as well as pricing within the individual markets in which the companies operate. Transfer pricing has been considered for many years as a compliance issue whereby tax revenue authorities have legally required taxpayers to set, prepare, and document transfer pricing documentation and submit to them (Muhoho, 2012). Determination of the right transfer price is influenced by many factors. In fact, one study (Burns, 2001) recognized ten factors. Among them were market conditions, economic conditions, and competition in the foreign market, exchange and price controls, and differences in income taxes in different countries. Transfer pricing is a tool which reduces global corporate tax and indirect business tax. So, by successfully applying transfer pricing the MNCs can increase their competitive superiority.

PURPOSE

The specific purpose of this study is to find out the answer of the questions that as a strategic tool how MNCs operating in Bangladesh are applying transfer pricing and how it can contribute to achieve competitive advantage of those MNCs.

ANALYSIS TOOLS

This study adopted a descriptive research design. A descriptive research design is best for this study as it describes characteristics associated with the subject population.

OBJECT OF RESEARCH

Focus of the study is on MNCs operating in Bangladesh, the population of interest comprised all MNCs operating in Bangladesh in the various sectors of the economy such as FMCGs, agriculture, manufacturing, construction, tourism, financial services amongst others both large and medium enterprises. As sample eight companies was selected randomly namely Unilever, Bata, Glaxosmithkline(GSK), Samsung, Nestle, Toyota, Coca Cola, Exxon Mobil. This study relied on both primary and secondary data. Primary data were collected by use of a self made questionnaire. The target respondents for the questionnaire were Senior Managers and Managers working in the respective MNCs since they had a better understanding of the corporate strategy and implementation of transfer pricing as a strategic tool. The main source of secondary data that were information on the websites and annual reports of the sample MNCs. This helped in understanding MNCs mission, vision and strategy. Other secondary data sources were Transfer Pricing policies of MNCS, Articles, and Journals on transfer pricing which were principally used to understand the MNCs being subject of this study. The collected data was cleaned, edited and entered into a computerized system to enable carrying out of descriptive statistical analysis of the data. The data was coded and presented in a thematic manner. Thereafter, the data was analyzed using descriptive statistics and in particular, used the mean as a measure of central tendency. The data was then tabulated and the most appropriate tables chosen to present the findings.

DISCUSSION

The findings of the study present an analysis of the information obtained with a view to fulfill the research question as outlined in the study. 40 questionnaires were distributed to the respondents of which 28 were completed. Thus the response rate was 70%. From the analysis it was established that the most common application include minimizing overall tax liability of MNC with a 57.14% frequency or popularity. Other common applications included minimizing tax duties on imports and exports, market penetration strategy, minimizing foreign exchange losses, motivating subsidiaries managers, performance and measurement of subsidiaries and avoiding exchange control restrictions with 50.00%, 42.86%, 39.29%, 38.22%, and 32.14% respectively. The least common applications included risk analysis and bench marking tool with 10.71% and 7.14% respectively. In addition, a few respondents also indicated that transfer pricing may be used to support subsidiaries for example providing stock and raw materials at a favorable price. The results are indicated on the following Table :

The respondents were asked to state whether transfer prices affect sales level and profit achieved by the company. It was found that, 35% strongly agreed, 27% agreed, 18% remained neutral, 13% disagreed and 7% strongly disagreed. Majority of the respondents were certain that transfer prices affect sales level as well as profitability.

As to whether transfer pricing is used as a measure of performance. 26% of the respondents strongly agreed, 24% agreed, 32% remained neutral, 12% disagreed and 6% strongly disagreed. Majority of the respondents were not aware that transfer pricing is used as a measure of performance for departmental heads. To find out whether the respondents understood that transfer pricing set by the company affect the level of other intercompany transactions with related non-resident companies, it was found that, 28% strongly agreed, 23% agreed, 30% remained neutral, 13% disagreed and 6% strongly disagreed. Majority of the respondents understands that transfer pricing affects level of intercompany transactions with related nonresident companies. 51% of the respondents agreed that apart from buying and selling transactions between resident corporate with nonresident related corporate, other transactions affected by transfer pricing include: provision of marketing and logistics support, sale and lease of tangible and intangible assets, borrowing of money to capitalize the business among others.

CONCLUSION

Transfer pricing has been viewed for many years as a compliance issue whereby MNCs are legally required to prepare, document and file with tax revenue authorities. Additionally, most authors have written on economics, accounting, taxation and finance aspect of transfer pricing. In contrast to a purely finance, economic and tax-driven mechanism, transfer pricing can be considered as a tool for advancing MNCs strategy in Kenya. Results indicate that executives are not solely focused on finance, economics and taxation issues as the primary objective of transfer pricing. MNCs in Bangladesh employ transfer pricing to assist in achieving corporate strategy and other corporate objectives as well. In general, executives perceive that transfer pricing does influence measures of corporate performance. This is supported by the finding that transfer pricing also contributes toward achieving objectives. Among the business strategies that MNCs seek to achieve through transfer pricing include market penetration strategies including increasing turnover and market share, tax minimization strategies, cost of capital as well as cash flow strategies. The study further revealed that such strategies are achieved by adjusting the transfer price between related parties which is possible due to common control between related parties.

THE IMPACT OF TRANSFER PRICING ON ECONOMIC GROWTH IN NIGERIA

Nnaemeka N. Obasi (PhD)

International Journal of Academic Research in Business and Social Sciences Dec 2015, Vol. 5, No. 12 ISSN: 2222-6990

INTRODUCTION

Transfer pricing is on the radar in both developed and developing countries and could be defined as the structuring and pricing of transactions between members of the same controlled group. Specifically, the concern is with cross-border transaction between parent companies and the subsidiaries or among different companies where income and expenses are allotted between or among tax payers in different countries. However, many countries including Nigeria also consider domestic transactions between affiliates. Transactions between parent companies and its subsidiaries cover the sale of tangible goods and the leasing or sale of intellectual property to provision of services. The abuse of transfer pricing by the foreign investors’ has become a concern of Nigeria because of the significant amount of money in play. Put simply, Nigeria law on transfer pricing aims at retaining much of the profit derived from the exploitation of her resources and other business activity carried out in the country. This study is the first to investigate the impact of transfer pricing on economic growth in Nigeria using quantitative method. Significant transfer pricing takes place in Nigeria via over-invoicing of imports and underinvoicing of exports (see Ajayi 1992, p. 6 and section 2 of this work). Over-invoicing of import is used by the multinational companies to repatriate profits from Nigeria which creates room for low company tax, while under-invoicing of export transaction is used by the foreign investors’ to avoid or reduce export surcharges or to evade income tax to facilitate capital flight.

PURPOSE

This study to investigate the impact of transfer pricing on economic growth in Nigeria using quantitative method.

HYPOTHESES

Research hypotheses 1. There is a long run significant relationship between transfer pricing and economic growth in Nigeria. 2. There is Granger causality relationship between transfer pricing and economic growth in Nigeria. 3. There is impulse response relationship between transfer pricing and economic growth in Nigeria.

Estimation of Transfer Pricing and Model Specification For the estimation of transfer pricing, our methodology with the necessary adjustment is presented below: TP = FDI – CA (1) Where TP refers to transfer pricing, FDI refers to the net flows of foreign investment and CA represents current account balances. The right hand side of the equation shows the official or recorded transactions reported in the balance of payment and so, transfer pricing implies the “unrecorded” capital outflows. In order to account for errors in current account data, adjustment needs to be made (Boyce and Ndikumana 2001). The reason for the adjustment in current account data is that export and import data could be inaccurate due to the high rate of mis-invoicing of exports and imports (see Gulati 1987). In countries where transfer pricing is high, it in incontrovertible to assume that trade mis-invoicing may be used as an opium for capital flight. The FDI in the equation could be captured by the residents acquiring foreign assets by over-invoicing imports and under invoicing exports. However, government policies may change both the import over-invoicing and export underinvoicing to opposite sides. According to Ajilore (2010) such reverse results in an understatement of the current account deficit and consequently leads to an overstatement of the residually derived capital flight estimates. Due to the presence of these counteracting effects, the net effects of trade mis-invoicing upon transfer pricing estimates can go in either direction. Hence, trade mis-invoicing data (proxy for transfer pricing) used in this study captures the discrepancies in the export and import invoicing. The equation below incorporates three independent variables for the purpose of investigating the impact of transfer pricing on economic growth in Nigeria. = + + + (2) Where GDP (a proxy for economic growth), is GDP at current prices divided by implicit price deflator to take care of inflationary rate. TM is trade mis-invoicing (proxy for transfer pricing) and is the difference in export and import invoicing, while UN is the unemployment rate. The a priori expectation is that the second and third explanatory variables will exert negative impacts on the explained variable.

ANALYSIS TOOLS

This study utilized time series data on economic growth, foreign direct investment and trade mis-invoicing from Central Bank of Nigeria various issues for the period of 1970-2004 due to lack of data before and after the aforementioned period, using Johansen co-integration and Granger causality method.

Co-integration test is adopted because it can be used in a higher dimensional system where two or more variables do co-integrate and it takes into account the short run dynamics that exist among the co-integrating variables. Granger causality is also used to ascertain the direction of causality relationship. Diagnostic tests are conducted to ascertain whether the results are spurious, while variance decomposition and impulse response function are included to add rigour.

OBJECT OF RESEARCH

This study utilized time series data on economic growth, foreign direct investment and trade mis-invoicing from Central Bank of Nigeria

DISCUSSION

Unit Root Test Analysis

The reason for conducting unit root test is to ascertain whether the variables are stationary to ensure that spurious results are not realised. From Table 2 below, the Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) tests indicated that none of the variables are stationary at level. It shows that. However, at first difference, all the variables are stationary when both Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) tests were used. Thus, the variables qualify for the next stage of test; co-integration test.

Optimal VAR Lag Length

With reference to Table 3 below, the lag length selected to investigate the long run relationship between transfer pricing and economic growth in Nigeria is 6. This lag length is selected because it gives positive and significant relationship between the dependent and the independent variables.

Johansen Co-integration Result

Table Johansen Co-integration Results (Series: LGDP, TM and UN)  shows that in both the trace and maximum-eigen value tests their statistics are greater than the critical values with p-values less than 0.05, which indicates that long run equilibrium relationship exists among the (LGDP, TM and UN) co-integrating variables. The long run equation result realised from co-integration test using E view 8.0 indicates that both TM (transfer pricing) and UN negatively relate to economic growth. The t-statistics are significant. So the first research question is accepted. It shows that transfer pricing exerts negative effect on economic growth in Nigeria.

Vector Error Correction Result

Results from the vector error correction result in Table Vector Error Correction Results  indicate that the error correction coefficient is properly signed at -0.295801 and significant. The coefficient indicates that a deviation of economic growth (LGDP) from the equilibrium in the long run caused by short run shock is corrected by 30% in each year. Thus, the short run dynamics does not contradict but rather supports the co-integration relationship that exists between the dependent (LGDP) and the independent variables (TM) and (UN). The coefficient of determination ( R2) shows that 78% of variation in economic growth is explained by the variation in trade mis-invoicing and unemployment.

Granger Causality Result

With reference to Table Granger Causality Test Result, the causality test for the short run relationship between economic growth and trade mis-invoicing (TM) indicates that TM (transfer pricing) as well as UN does not Granger cause economic growth. Thus, the hypothesis which states that there is a Granger causality relationship between transfer pricing and economic growth is rejected. This is because the F-statistics and the p-values are not significant and not less than 0.05 respectively.

Variance Decomposition Analysis

The forecast error variance decomposition could be used to make inferences about the proportion of movements in time series due to its own shocks versus shocks to other variables in the system. Is the variance decomposition result and it shows that the variance of economic growth (LGDP) rates is caused by 100 percent by itself in the first year. In the second year the economic growth rates variance is decomposed into its own variance (96%). The own shocks of economic growth constitute a significant source of variation in growth forecast error in the time horizon ranging from 100 percent to 91 percent. Seven years after, variation in economic growth is accounted by trade mis-invoicing (TM, 5.43%) and unemployment (UN, 2.46%). In a nutshell, the changes in economic growth are mainly caused by its own variation. The salient feature of Table Variance Decomposition Result  above is that besides economic growth, the predominant source of variation in economic growth is trade mis-invoicing (transfer pricing) followed by unemployment.

Impulse Response Analysis

Impulse response analysis shows the responsiveness of a dependent variable in a VAR to shocks from each of the variables. Figure 1 is the impulse response result. It shows the response of economic growth to shocks in trade mis-invoicing (transfer pricing). Figure 1 shows that the response of economic growth to transfer pricing is favourable only in second, fourth and fifth period. So the third hypothesis is accepted. However, it is negative in all other period. This shows that to a greater extent transfer pricing exerts negative effect on economic growth in Nigeria. The impulse response confirms the Granger causality result.

Correlation Matrix and Diagnostic Tests Analyses

The correlation matrix result in Table Correlation Matrix and Diagnostic Tests  in the next page shows that the explanatory variables are negatively related to economic growth. It further reveals that the values in the correlation matrix results for correlation are low which indicate that the long run, Granger causality, variance decomposition and the impulse response results in this study are not spurious. The variables also pass through other necessary diagnostic tests regarding heteroscedasticity, normal distribution and serial correlation. In all the results the p-values are greater than 0.05 which shows that the null hypothesis of no heteroscedasticity and no serial correlation is accepted while the alternative is rejected, while the null hypothesis of no normality of error term is rejected and the alternative accepted.

CONCLUSION

In this study we have presented an analysis of the long run and short run using co-integration and Granger causality respectively as well as variance decomposition and impulse response function to ascertain the impact of transfer pricing (using trade mis-invoicing as proxy) with one other variable (unemployment) on economic growth. All the econometric results indicate that transfer pricing exerts negative effect on economic growth in Nigeria. Thus, there is need for policy makers to shift policy in this direction. Government should try to go beyond arm’s length method of checking transfer pricing and adopt other methods such as reduction in: ad valorem tariff, capital gain tax, petroleum profit tax and company tax to curtail foreign direct investment engagement in transfer pricing. This in effect will act as an incentive to investment and increase economic growth in Nigeria.

SUMBER :

http://hrmars.com/hrmars_papers/The_Impact_of_Transfer_Pricing_on_Economic_Growth_in_Nigeria.pdf
http://publicationslist.org/data/ahmed/ref-28/10.5.pdf