IOSR Journal of Economics and Finance (IOSR-JEF) e-ISSN: 2321-5933, p-ISSN: 2321-5925.Volume 11, Issue 4 Ser. VI (Jul. – Aug. 2020), PP 07-23 www.iosrjournals.org DOI: 10.9790/5933-1104060723 www.iosrjournals.org 7 | Page The Effect of International Transfer Pricing Practices on Economic Growth in Kenya Lucy Kalekye Musya 1 Timothy Okech 2 Tabitha Nasieku 3 Abstract The use oftransfer pricing and other highly complex tax planning schemes have been a major concern by policymakers in many jurisdictions including KenyaIn the process countries lose out on revenue necessary for development and recurrent expenditures which has negative implication on economic growth. The general objective of the study was to determine the effect of international transfer pricing practices on economic growth in Kenya. This was guided by three specific objectives namely to determine the effect of trade mis-invoicing practices on the economic growth of Kenya; to determine the effect of foreign exchange rate adjustmentpractices on the economic growth of Kenya; and to determine the effect of transfer pricing policies on the economic growth of Kenya. The study employed a quantitative research design and used a time series to covering twenty years from 1997 to 2016. Error correction model was used for analysisgiven the presence of cointergrating variables. The study found that trade misinvoicing practices had a positive and insignificant effect on economic growth of Kenya, while foreign exchange rate fluctuations had a negative and significant effect on the economic growth of Kenya. Additionally, trade misinvoicing practices and foreign fluctuations as attributes of transfer prices jointly account forabout sixty six of the variations in the dependent variable in this case economic growth. The studyadds to the existing literature on international transfer pricing practices and economic growth, it is of great value to the academic fraternity and as a basis for, investors, creditors, Kenya Revenue Authority and the government. Kenya should introduce measures aimed at curbing trade misinvoicing practicesand foreign exchange fluctuation. Kenya shouldalso introduce rules aimed at avoiding the undue transfer of profits through controlled transactions conducted between related entities within a multinational group in order to deter international transfer pricing practices.This will lead to an increase in the GDP of Kenya and consequently economic growth. Keywords: International transfer pricing, trade misinvoicing, Foreign exchange fluctuation. --------------------------------------------------------------------------------------------------------------------------------------- Date of Submission: 26-07-2020 Date of Acceptance: 09-08-2020 --------------------------------------------------------------------------------------------------------------------------------------- I. Background of the Study Globalization and economic integration has caused increased economic activity within a very small number of MNEs increasing the difficulty for governments to collect public revenue given that multinationals are able to move their profits across jurisdictions to minimize their tax liability (Liu, Schmidt-Eisenlohr&Guo, 2017). At times, MNCs manipulate the priceby transferringgoods and services between controlled entities within the multinational group (Desai, Foley &Hines, 2006). With globalization MNEs are able to create branches or subsidiaries, in supposedly favorabletax jurisdictions to take advantage of foreign direct investment incentives, double tax treaties and reduced taxes. The ability of MNEs to also optimize on global production brings in new and greater opportunities for transfer pricing strategies by making it possible for multinational corporations to shift profits to more desirable locations and thereby reduce their tax liabilities or avoid taxes altogether consequently reducing economic growth(Bhat, 2009). They achieve this by transferring goods between controlled entities operating in different tax jurisdiction (Kaplan and Atkinson, 1998). This is among the set of strategies through which MNEs attempt to send a fraction of their profits offshore in order to reduce their income tax liabilities. This implies that the price of goods and services is determined by a highly sophisticated internal sales system within subsidiaries of the MNE and not by the local market structure. This in the process creates opportunities for MNEs to alter the market prices depending on the market dynamics in different jurisdictions. Multinational corporations can thus minimize the taxes payable, foreign exchange rate risks and thereforeoptimize their global profits (Moussavi, 1996). 1 Jomo Kenyatta University of Agriculture and Technology and corresponding author: lucykalekye@yahoo.com 2 United States International University - Africa 3 Jomo Kenyatta University of Agriculture and Technology