Advance Pricing Agreement Adoption, Tax Compliance Cost, and Income Tax Compliance Among Multinational Corporations Operating in Kenya

Abstract

The study sought to determine the effect of advance pricing agreements adoption on income tax compliance and the moderating effect of compliance cost on this relationship among multinational corporations operating in Kenya. This study adopted an explanatory research design and targeted all 972 registered tax consultants in Kenya with a sample size of 284 firms. Primary data was collected through a questionnaire. Descriptive statistics were adopted to analyse the collected data, and the results were presented in the tables and charts. Hierarchical moderated regression analysis was also undertaken to determine the nature and strength of the relationship between the study variables. The regression results showed that APA validity period (β = 0.170), tax dispute resolution time (β = 0.255), pricing agreement compliance cost (β = 0.358), and tax compliance cost (β = 0.534) each had significant positive effects on income tax compliance. In addition, the moderating effects were also significant, with compliance cost strengthening the relationships between validity period (β = 0.378), tax dispute resolution time (β = 0.574), and pricing agreement compliance cost (β = 0.849) with income tax compliance. The study recommended that Kenya should adopt Advance Pricing Agreements to enhance tax compliance by providing predictability, reducing disputes, and fostering trust. Improving tax dispute resolution through digital systems, strict timelines, and alternative dispute resolution mechanisms can build certainty and encourage voluntary compliance. Rationalizing compliance costs by simplifying processes and ensuring affordability can promote openness, protect revenues, and support a business-friendly environment.