Effect of tax avoidance schemes on corporate tax performance by multinational companies

Abstract

The government receives a significant portion of its funding from corporate tax contri butions. Kenya’s bulk of revenue collection; about 40% is from corporate taxes. In addition to missing its revenue targets, Kenya has witnessed a decline in corporate taxes collection over the years. Various tax avoidance schemes create a positive impact on companies in terms of corporate taxes saved, downside is that the minimum tax paid by the multinational enterprises threatens the capability of the government to finance public expenditure Since there is a shortfall in the amount of revenues collected. The digital economy has created great trading opportunities to sell products and services to people in a nation without having a significant physical presence, Facilitating eroding of tax bases since requirements for a taxable presence under the current tax laws are non-existent. Organisations such as OECD provide guidelines and recommendations on business practices; however, Globalization and the swiftly evolving framework of global business models combined with a Lack of alignment in choosing comparable transactions for transfer pricing has seen an increase in transfer mispricing. A recent increase in corporations relocating their headquarters has raised the inversions concern giving ground for research into the matter. Past research studies on the subject focused on developed countries This study sought to determine the effect of tax avoidance schemes on corporate tax peformance of multinational corporations in Kenya. The specific objectives included to examine the effect of tax base erosion, transfer pricing, and inversions on corporate tax performance of multinational corporations in Kenya. This study was anchored on deterrence theory and the institutional theory. Explanatory research design was utilized. Target population was 78 KRA staff tasked with MNCs corporate tax under KRA International Tax office. The International Tax office has four departments: Intelligence & strategic operations, strategy innovation, risk management, Investigations & Enforcement departments at the Nairobi KRA offices. This study population is relatively small and hence the census design was necessary. Primary data was collected using structured questionnaires. Data was analyzed using descriptive statistics such as percentages and frequencies. Inferential statistics including correlation and regression analysis were also used to test the relationship between the study variables. The findings indicated that tax base erosion had a negative and significant influence on corporate tax performance of multinational corporations in Kenya (β= - 0.318, p=0.002), transfer pricing had a negative and significant influence on corporate tax performance of multinational corporations in Kenya (β= -0.285, p=0.010); and inversions had a negative and significant influence on corporate tax performance of multinational corporations in Kenya (β= -0.356, p=0.009). The study concluded that tax avoidance schemes of tax base erosion, transfer pricing, and inversions have a significantly negative influence on corporate tax performance of multinational corporations in Kenya. Multinational companies should consider proper tax reporting in host countries to improve capital inflows Tax authorities should put in place competitive tax policies that encourage multinational companies to invest while protecting local tax bases. KRA should put in place measures that will sufficiently deal with all foreign-sourced incomes to enhance corporate tax performance. The study makes a significant contribution to policy, practice, and theory in the field of tax administration. This study is limited to tax base erosion, transfer pricing, and inversions further research is required on related factors that affect tax base erosion, transfer pricing, and inversions.