NAMA KELOMPOK :
Congruence of Competitive Advantage and Transfer Pricing: A Study on Selected MNCs Operating in Bangladesh
- 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.
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.pdfhttp://publicationslist.org/data/ahmed/ref-28/10.5.pdf