Abstract:

The main objective of the Study was to assess the implication of transfer pricing scheme on manufacturing companies’ profitability in Tanzania. Specifically aimed to determine the cause and effect relationship of interest payments on related party loans, payment of service fee on intercompany services and royalty payments for the use of related party intangible properties on manufacturing companies’ profitability. The study adopted a positivism philosophy and adopted deductive reasoning. The secondary data was collected from 4 manufacturing firm’s annual report for the period of 2013 to 2022. The study used multiple linear regression for data analysis and this was done through STATA software version 14.2. The study findings show that Interest payments on related party loans has significant negative effect on manufacturing companies’ profitability. Furthermore, the result shows that payment of service fee on intercompany services has no significant effect on manufacturing companies’ profitability. Finally, Royalty payments for the use of related party intangible properties has significant positive effect on manufacturing companies’ profitability. Current study recommends that, for companies to comply with relevant transfer pricing regulations, close supervision by taxing authority (TRA) is considered necessary to reduce unhealthy transfer pricing practices. Also, study recommends that interest payments on related party loans should be set at values that would not negatively impact the financial performance of manufacturing firms in Tanzania. Related party companies should set transfer price to reflect the ALP (arm’s-length price) that unrelated parties would agree to in the same circumstances for transfer or use of similar intangible property. Moreover, the study recommends government to put in place monetary policies that will facilitate financial performance of listed manufacturing companies and ensure proper regulation of the financial institutions so as to provide adequate credit facilities for the manufacturing firms in Tanzania.