Transfer pricing, earnings management and tax avoidance of firms in Ghana

Purpose: This paper aims to investigate how transfer pricing (TP) and earnings management affect tax avoidance of firms in Ghana. Design/methodology/approach: The authors use a panel data set from 2008 to 2015 to further shed light on transfer pricing-tax avoidance nexus by examining the complex interaction of three key variables: transfer pricing, earnings management and tax avoidance. Findings: The results show that almost all the sample firms have engaged in some form of transfer pricing strategies and the manipulation of earnings to avoid tax during 2008-2015. There is evidence to suggest that non-financial multinational corporations manipulate more earnings than the financial firms while financial firms also use more TP than non-financial firms. The overall results suggest that the sensitivity of tax avoidance to transfer pricing decreases as firms increase their earnings management. By extension, these results have important policy implication for policymakers in assessing the effectiveness of tax laws relating to transfer pricing. Originality/value: The authors investigate how transfer pricing and earnings management affect the avoidance of firms operating in Ghana.