CHAPTER THREE

REASEARCH METHODOLOGY

3.0 Introduction

Transfer pricing is a very sensitive and complex area to study (Mulyani, 2010). One of the main

challenges is collecting data since much of the reliable data on transfer pricing are held by tax

authorities but difficult to access due to privacy and confidentiality concerns. Also, tax payers

(individuals and organizations) are always reluctant to give information about their Transfer

pricing behaviour. As a result, designing an appropriate methodology to obtain data is critical to

the current study.

Besides, access to data, the collection of data on transfer pricing in Ghana is also faced with a

number of challenges. Very few empirical studies of multinational enterprises and their transfer

pricing behaviours exist in the country, thus, very little literature with established methodologies

to guide the empirical component of the study. Also, it appears there is no publicly available

research or information on how Ghanaian tax authority, Tax payers and tax practitioners should

respond to requests for information relating to transfer pricing.

There is also no guarantee that the methodologies used successfully in previous empirical studies

on transfer pricing in other contexts will have the same results in Ghana due to various reasons

including cultural factors and attitudes toward academic research.

Based on the above, this chapter sets out the methodology of the study, using a mixed method of

survey.
The chapter contains the following sections: research design, research population, sampling

techniques and sample size, data collection instruments and methods, data processing and mode

of analysis, variables, statistical models and ethical consideration.

3.1 Research Philosophy

The study adopts the pragmatism research philosophy. The pragmatism philosophy argues that

the most important determinants of the epistemology, anthology and axiology you adopt is the

research question as one may be more suitable than the other in answering particular research

questions (Saunders et al., 2009, p.109).

Saunders et al., (2009. p.109) citing Tashakkori and Teddlie (1998) noted that pragmatism is

more appealing, largely because it avoids the researcher engaging in what they see as rather

pointless debate about such concepts as truth and reality. Thus, the researcher studies what is of

interest and value in different ways which is deemed appropriate and uses the results in ways that

can bring positive benefits.

Under this philosophy, either observable phenomena or subjective meaning or both can provide

acceptable knowledge depending on the research questions. They also noted that it focuses on

applied research, integrating different perspectives to help interpret the data. The pragmatism

philosophy also allows mixed or multiple data collection methods and design, thus permitting

both quantitative and qualitative approaches to research. (Saunders et al., 2009 p119)
3.2 Research Strategy

The purpose of the research is to evaluate the effectiveness of international transfer pricing

methods, in preventing tax avoidance by multinational enterprises (MNEs) in Ghana. The study

adopted both exploratory and explanatory survey design and a mixed approach. Exploratory

research is conducted about a research problem when there are few or no earlier studies to refer

to. The focus is on gaining insights and familiarity for later investigation or undertaken when

problems are in a preliminary stage of investigation (Cuthill, 2002; Taylor and Walker, 2002).

The objective of exploratory research is to formulate problems, clarify concepts, and form

hypotheses. In conducting exploratory research, individuals who are knowledgeable in the

research topic are chosen by the researcher. It is qualitative in nature and seeks to create

hypotheses rather than test them. Examples of exploratory designs include interview with

experts, brainstorming with experts and survey to social networking.

Explanatory research on the other hand explains why an event occurs and forecast future

occurrence thus establishing relationship between variables being studied. It is associated with

probability sampling since the aim is to generalize the result of the population from which the

sample was selected. Data validity is determined by quantitative method and statistical test. The

Mixed method is adopted in situations where some research questions may be answered best by

quantitative and others by qualitative techniques. Mulyani, 2010 citing Alan Byrman indicated

that mixed method by definition is a methodology used in a research strategy by adopting more

than one research method.

A mixed method study involves the collection or analysis of both quantitative and/or qualitative

data in a single study in which the data are collected concurrently or sequentially, are given a

priority, and involve the integration of the data at one or more stages in the process of research

(Mulyani, 2010 citing John W Creswell et..al , 2003)

Adopting Mulyani, 2010 strategy in this study, a mixed method was used to obtain statistical

quantitative results. The results were then followed up with semi structured interviews to further

explain the results in greater depth. In addition, a multiple case study using in-depth interviews

was conducted to explore different aspects of transfer pricing behaviour in MNEs.

Mixed method has the advantage of combining both qualitative and quantitative techniques

thereby providing both numeric and narrative data. It also addresses research questions in respect

of conformity to exploratory research.-. Mixed method uses both probability sampling which is

commonly used in quantitative data collection, and purposive sampling, commonly used in

qualitative (Mulyani, 2010 ).

Quantitative research is based on the measurement of quantity or amount. It is applicable to

phenomena that can be expressed in terms of quantity. According to Boateng (2014, p133),

quantitative research seeks to determine the extent of a problem or the existence of a

relationship between aspects of a phenomenon by quantifying the variation. It seeks to test, to

support or disprove a proposed relationship between two or more aspects of phenomenon

(Boateng 2014). Quantitative research is structured because it starts with specific hypotheses or

questions derived from theory/previous research and uses objective instruments such as fixed

choice questionnaires, and attitude scales to collect data from selected samples. The results are
presented using statistics and inferences made to the population. Mulyani (2010, citing. Taylor

(2005) argued that quantitative data cannot fully answer questions relating to behavioural

sciences.

Qualitative research, on the other hand, is concerned with qualitative phenomenon, i.e.,

phenomena relating to or involving quality or kind. For instance, when we are interested in

investigating the reasons for human behaviour (i.e., why people think or do certain things), we

quite often talk of qualitative research. Boateng (2014, p.133) noted that 'qualitative research

tends to explore the meaning, attitudes ,values and beliefs people associate with a phenomenon

in order to establish a better understanding rather than to test to either support or disprove a

relationship. In citing Denzin and Lincoln (1994), Boateng (2014) equally noted that qualitative

research focuses on interpretation of phenomenon in their natural settings to make sense in terms

of the meanings people bring to these settings. Unlike quantitative research, qualitative research

is unstructured as it starts with general research problems and not by formulating hypotheses. It

uses unstructured instruments like interviews and observations. Data is collected from a small,

purposive sample which may or may not be representative of the larger populations. The results

are presented mainly in words. The Table presents some important differences between

qualitative, quantitative and mixed methods adopted from Mulyani, 2010 citing Tashakkory and

Teddlie ( 2009).

Differences between Qualitative, Quantitative and Mixed Methods

Qualitative Methods Quantitative Methods Mixed Methods

Form of Data Typically narrative Typically numeric Narrative and numeric

Research Usually Exploratory Usually confirmatory and Confirmatory and

Objectives and confirmatory exploratory Exploratory

Data Analysis Thematic strategies Statistical analysis Integration of statistical

(Categorical and (descriptive and and thematic, data

Contextualizing inferential) conversion

Sampling Mostly purposive Mostly probability Mixed, probability and

Purposive
Role of Theory Inductive logic Hypothetico-deductive Inductive and deductive

Model logic, inductive

deductive

research cycle

3.3 Research Approach

By adopting the mixed method both deductive and inductive approaches to research are used.

As noted by (Greener, 2008 and Saunders etal's, 2009), combining the deduction and induction is

not only perfect but also advantageous..

Creswell as cited by Saunders etal's, 2009, indicated that a topic with wealth of literature from

which theoretical framework hypothesis can be defined will lead itself to deductive approach as

compared to a topic with little literature which is appropriate to work using the inductive

approach by generating data and analyzing to reflect the theoretical themes.

Equally, time, risk and audience is of essence in choosing a particular research approach, thus

not all decisions about the research approach that a research makes would always be practicable.

(Saunders etal's, 2009.p127)

3.4 Sampling and Sample size Determination

The study population includes staff of Ghana Revenue Authority, Tax practitioners, Firms and

Multinational Enterprises. The target populations are the Transfer pricing unit of the GRA, the

tax unit of the Tax practitioners and the Tax and Finance unit of the Multinationals. This is due to

the assumption that they have the requisite knowledge to enable the researcher meet the research

objectives. It is also to ensure that staff of the population studied during the period whose work

have no link with transfer pricing are excluded from the study.

Purposive sampling technique, which is a non-probability sampling technique, was used to select

staff of the Ghana Revenue Authority (GRA) and respondents from the tax practitioners.

Saunders, et al ( 2009), citing Neuman,(2005) notes that this form of sampling is often used

when working with very small samples such as in a case study and when you wish to select cases

or people that are particularly informative and that will enable you to answer your research

question(s) and meet your objective. Convenient sampling technique on the other hand will be

used to select the respondents from the MNEs. This is because MNEs would not normally and

easily grant interviews on sensitive issues like transfer pricing without prior personal contacts

(Saunders, et al., 2009).

A sample size of 50 respondents was selected from a population because the area of study

required persons/respondents with skills and knowledge in transfer pricing. The 50 was made up
of 15 staff of the transfer pricing unit of the large tax payer unit of the Ghana Revenue Authority

(GRA), 15 staff (tax unit) from the selected tax practitioners firms, 20 staff (tax and finance

unit ) and 10 (2 from each MNE) MNEs .

3.5 Data collection methods and research instruments

To address the research questions and objectives and to find out facts and opinions on the

research, interview questionnaire was employed as the data collection instrument.

In dealing with the GRA, a letter of invitation was sent to the Deputy Commissioner of the large

tax payer unit where the transfer pricing unit falls under.

A meeting was arranged with the head of the transfer pricing unit to solicit his support in

administering the questionnaires to his staff. Based on his consent, structured questionnaires

were distributed to staff of the unit to answer. The researchers contact details were made

available to respondents to enable them seek clarification on questions and issues bothering on

the questionnaires.

The questionnaires were collected one week after they were administered. A reminder had been

sent to the Secretary of the transfer pricing unit, two days before the collection date.

This was followed by semi structured interview with the head of the transfer pricing unit to

clarify, corroborate information obtained from the staff through the structured questionnaires and

find other qualitative information that could not be obtained through the questionnaires.
On the part of the multinationals and tax practitioners, a letter of invitation was also sent inviting

them to participate in the research by availing themselves to answer the questionnaires and

participate in the interview.

The letter of invitation was supported by a letter of introduction from the university introducing

the researcher as a student conducting research on the topic. This was to gain the confidence of

the respondents and to clear any doubts they might have about the study.

A contact person(s) was used in some cases to facilitate access to the tax practitioners and

multinationals and other key personnel targeted as respondents for the study as they would

normally not grant audience on sensitive issues like transfer pricing to the public.

Based on the invitations, meetings were arranged with multinationals who agreed to participate

in the study (since some declined and indicated they needed approval from their parent

company/legal department to participate) to further explain the objective of the study and to

assure respondents of the confidentiality of the data collected.

Structured questionnaires were given to two staff of the finance/tax unit of the MNES and the

tax unit of the tax practitioners/consultants to answer for collection later by the researcher

because of their expertise in dealing with transfer pricing on behalf of their organizations and

clients. The researchers contact details were made available to the respondents to enable them

clarify any questions or issues relating to the study.

The questionnaires were collected one week after they were delivered. A reminder was sent to

respondents two days before the collection date.

The structured questionnaires were structured as follows: Demographic characteristics, Transfer

pricing policies used by the organization, and dominant transfer pricing method when dealing

with related parties. The questionnaires also included questions on management perceptions

about the factors influencing transfer pricing policy formulation ( This formed the hypothesis

tested). This was done using a five point likert scale (1 being extremely important, 2 very

important, 3 moderately important, 4 not too important and 5 being not important at all).

This was followed by semi structured interviews with the Managing Director or the Finance

Director of MNEs and the Tax managers of the tax practitioners/consultants to clarify,

corroborate information obtained from staff through the structured questionnaires and find other

qualitative information that could not be obtained through the questionnaires.

The data was collected in Accra and Tema where most of the offices, heads and key decision

makers of the multinationals and tax practitioners/consultants in Ghana are located.. The

sampling method used was convenient sampling for the MNEs since multinational enterprises

resist giving information on sensitive matters such as transfer pricing whilst purposive sampling

technique, which is a non-probability sampling technique, was used to select staff and

respondents from the tax practitioners.

According to Kirlinger (1973), the questionnaire is widely used for data collection especially in

educational research because it is very effective for securing information about people, practices

and conditions as well as for inquiring into the opinions and attitudes of the subjects. The

information obtained through a questionnaire is similar to that obtained by an interview but the

questions tend to have less depth (Burns and Grove, 1993). A number of both open-ended and

close-ended questions were designed to elicit responses from the sample population.
In administering the questionnaires, the process was made as flexible as possible in order to

make it more efficient. Despite emphasis on timely administration of the questionnaires, there

were exemptions whereby top level management of the organizations were given more time to

adjust their busy schedules to accommodate the researchers request. The top level managers

therefore had more time to complete and submit their questionnaires.

Interview is also considered an appropriate methodology for a study of this nature which

examines a sensitive and complex issue (Wai, 2004).

Semi-structured interviews are based on the use of an interview guide. According to Padgett

(1998), an interview guide contains an initial set of questions that are to be discussed during the

interview. Semi-structured interviews combine the flexibility of the unstructured, open-ended

interview with the directionality and agenda of the survey instrument to produce focused

qualitative, textual data. (Padgett 1998),

3.6 Data analysis

The data that was used in the study were collected from the staff of the Ghana Revenue

Authority, selected tax practitioner firms and MNEs. The data collected was organized in two

stages. The data was organised and subsequently coded and entered into the Statistical Package

for Social Sciences (SPSS), 20.0 versions to facilitate data analysis and description. A number

of parametric and non-parametric statistical tools such as T test, Analysis of Variances and

covariance Regression, chi-square among others were employed to aid the analysis and

interpretation of data.
3.6.1 Statistical Model.

The statistical model for the research is logistic regression. This measures the relationship

between the categorical dependent variable and one or more independent variables, which are

usually (but not necessarily) continuous, by estimating probabilities. Thus, it treats the same set

of problems as does probit regression using similar techniques; the first assumes a logistic

function and the second a standard normal distribution function. It models the relationship

between a dependent and one or more independent variables, and allows us to look at the fit of

the model as well as at the significance of the relationships (between dependent and independent

variables) that we are modeling. However, the underlying principle of binomial logistic

regression, and its statistical calculation, is quite different to ordinary linear regression. While

ordinary regression uses ordinary least squares to find a best fitting line, and comes up with

coefficients that predict the change in the dependent variable for one unit change in the

independent variable, logistic regression estimates the probability of an event.

Logistic regression is very similar to ordinary regression , but the Y variables is logit () instead

of itself.

LO Wai (2003) Citing (Simons 1987; Menon and Williams 1991; Norusis 1999; Balakrishnan

and Soderstrom 2000) noted that to further investigate the significance of management

perceptions of the importance of variables to the choice of transfer pricing method in a

multivariate setting, a logistic regression analysis is performed.

3.6.2 Model Specification, Estimation and Test.

The aim of the logistic regression is to correctly predict or estimates the category of outcome for

individual cases using the most closest model that include the predictor variables that are useful
in predicting the response variable (Antwi etal, 2014). In this study the probability of a transfer

price method being effective is influenced by ,Staff Knowledge of TP Methods, Experience on

TP methods application, Resources assigned to TP audit, Availability of comparables, and

Frequency of TP Audit by the tax auditors among others.

To this end, the logistic regression in this study uses the maximum likelihood estimation

techniques to estimate the coefficients. This method yields the values of and which

maximize the probability of obtaining the observed set of data by constructing a likelihood

function which expresses the probability of the observed data as a function of the unknown

parameters and ,

Thus the likelihood function for a given value of the Predictor X in a univariate case is given by:

P(Y=1| x)y* P(Y=1| x)1-y

When Y=1 contribution function = P(Y=1| x)

When Y=0 contribution function = P(Y=0| x)

However the likelihood function of a data is the product of the individual contributions thus

Likelihood function (L) = P(Y=1| x)y* P(Y=1| x)1-y

Taking the natural Logarithm of the likelihood function gives the log likelihood function as

LL= Y log [P(Y=1| x)] +(1-y) log [P(Y=1| x)]

The log likelihood function is differentiated in respect of and and equated to zero in order to

get the values of the parameters that maximize the log likelihood function. The resultant equation

is solved using iteration method to get the values of and which are referred as the maximum

likelihood estimates of the parameters.

The significance and quality of the model is assessed using the likelihood ratio test (LRT)

statistic which is a ratio of the likelihood at hypothesized parameter values to the likelihood of
the data at maximum likelihood estimation (MLEs). LRT test the null hypothesis H0: 0= 1=

2.. =p=0.

The LRT statistic is given by:

LR= -2log L at H0
L at MLEs

LR = -2log(H0)+2log (MLE)

This has a chi-squared distribution with n-p degree of freedom. A small p value leads to the

rejection of the Hypothesis H0 and a conclusion that one or (more) of the p coefficients are

different from than zero (0).

Once the model fit the given set of data, its adequacy was determined using goodness of -fit

test and examination of influential observations. A model is consider fit when the difference

between the observed and fitted values are small and if there is no systematic contribution of

differences to the error structure of the model (Antwi etal, 2014).

Several statistical methods have being developed to assess the fitness of a chosen model (The

pseudo R2, scale Deviance, Pearson goodness of fit chi-square test and information criteria

among other), however the study adopted the Hosmer and Lemeshow test which divides the

range of probability values into groups based on covariate pattern and compared the observed

and the expected counts within these groups using the chi-square statistic test. The smaller, the

expected and the observed counts, the smaller the overall variance and thus the test statistic

value. Therefore, a large p-value indicates a good fit.

The hypothesis of the model fitness can be measured by Hosmer and Lemeshow test as follows:

H1: the model fits the data

H0: the model does not fit the data

3.6.3 Model Justification:

The logistic regression is robust against multivariate normality and therefore better suited for

smaller samples than a probit model. (www.statisticssolutions.com/the-logistic-regression-

analysis-in-spss).

Logistic Regression uses a different method for estimating the parameters, which gives better

resultsbetter meaning, unbiased, with lower variances.( www.theanalysisfactor.com/why-

logistic-regression-for-binary-response)

Logistic regression allows for the inclusion of more than one explanatory variable (dependent

variable) and these can either be dichotomous, ordinal, or continuous. Also logistic regression

provides a quantified value for the strength of the association adjusting for other variables

(removes confounding effects). The exponential of coefficients correspond to odd ratios for the

given factor.

However the combination of both binomial and normal distribution in logistic regressions can

sometimes cause problems. Also defining variables to enter in the model, adding, or removing

explanatory variables can be complicated and must be carefully planned.

3.6.4 Model for testing the effectiveness of transfer pricing method

The logistic regression function is as follows:

TPM EFFECTIVENESS = 0+1FUNCTION +2COMPARABILITY +3KNOWLEDGE

+4EXPERIENCE +5 RESOURCES +6 AUDIT FREQUENCY +

where:

Dependent Variables:

Method effectiveness = 1 if an MNE transfer pricing method selected was effective and accepted

by Ghana tax authority, 0 otherwise;

Policy Variables:

FUNCTION= 1, if transaction functionality easily identifiable, 0 otherwise;

COMPARABILITY = 1, if transaction have arm's length comparables available, 0 otherwise;

KNOWLEDGE = 1, if GRA staff have the require knowledge and skill to analyze transaction, 0

otherwise.

EXPERIENCE = 1, if GRA staff experience in TP method applications , 0 otherwise

Control Variables:

RESOURCES = 1, if GRA resources allocation to TP Activity are adequate, 0 otherwise;

AUDIT = natural logarithm of MNEs

MNEs = 1, if MNEs are Knowledgeable in TP laws and application 0 otherwise

The dependent variable of the regression is a dichotomous variable to identify which transfer

pricing method is effective based on the policy variables identify.

3.6.5 Model for Testing Factors influencing MNE choices of transfer pricing method

The logistic regression function is as follows:

TP
Vari

where:

TP = Model score of the logistic description ( 0 if cost-based methods are used, and 1

if market-based methods are used)

Vari = the importance of variable i, where i = 1,2, .,5, measured by a five-point scale with 1

being extremely important and 5 being not important at all.

These variables are:

Var1: Difference in income tax rates

Var2: Minimization of custom duties

Var3: Interest of local partners

Var4: Foreign exchange control and risks

Var5: Restrictions on profit repatriation

Var6: Political Risks

Var7: Good relationship with the Ghanaian government

ai values are the regression coefficients.

3.7 Variables

The variables studied included socio demographic and professional characteristics, Staff

Knowledge of TP Methods, Experience on TP methods application, Resources assigned to TP

audit, Available of comparable, Frequency of TP Audit by the tax auditors, Perceived

effectiveness by GRA and tax practitioners and factors influencing the choice of a particular

method.

3.8 Access and ethical consideration

The participants in this research study were volunteers solicited by the researcher, and informed

of the purpose of the study via an invitation to participate letter. The researcher maintained the

highest standard of ethics at all times during engagement with research participants, and

complied with the Kwame Nkrumah University of Science and Technology (KNUST) Research

Policy. As suggested by Cooper and Schindler (2001), the research was specially designed so

that participants would not suffer intentional physical harm, discomfort, mental anguish,

embarrassment, or loss of privacy. To safeguard against these concerns, when making contact

with the research participants, the researcher communicated the studys benefits, taking care not

to overstate or understate the benefits.

The researcher obtained an introductory letter from KNUST graduate school . The purpose and

the objectives of the study were concisely explained to the target respondents. The

confidentiality of their responses was clearly explained for the appreciation of the respondents.

3.8 Limitation of the study Methodology

The research used various instruments to collect the data. However these instruments come with

some limitations. The used of questionnaires do not provide an opportunity for the respondent to

clarify questions asked. Also it does not motivate the respondent to answer the questionnaires.

Respondents demeanor too, cannot be observed (Mulyani, 2010)

In order to address these limitations, semi-structured interviews were conducted to address

questions that were not clear in the questionnaire, collaborate information obtained from the staff

through the structured questionnaires and find other qualitative information that could not be

obtained through the questionnaires.

Interview however, is also time consuming and is dependent on the interviewee conditions.

People are also always reluctant to be interviewed on sensitive subjects such as price transfer

pricing.

There is therefore the possibility of the respondents (Tax official, Tax practitioners and MNEs)

being bias and potentially dishonest in their answers to questions since no tax official will speak

against his employer and no Multinationals will accept that they are involved in transfer

mispricing.
This weakness was addressed by first meeting the interviewees to discuss with them the

objectives of the study and the confidentiality of their responses to win their trust so that they

could speak freely and openly.

The interviewees for semi structured interviews were the head of transfer pricing, Tax partners/

managers of practitioners firms, and senior managers of multinationals who had limited time at

their disposal to participate in the interview.

To address this limitation the interviews were pre-arranged at the convenience of the

respondents/interviewees.

Also purposive sampling technique, which is a non-probability sampling technique, was used to

select staff of the Ghana Revenue Authority (GRA) and respondents from the tax practitioners.

This was to ensure that people that are particularly informative and that will enable the

researcher to answer your research question(s) and meet your objective are selected. Convenient

sampling technique on the other hand was used to select the respondents from the MNEs. This is

because MNEs would not normally and easily grant interviews on sensitive issues like transfer

pricing without prior personal contacts.