Effect of Thin Capitalization on Corporation Tax Compliance Among Multinational Corporations in Nairobi, Kenya

Abstract

Over the past few decades, the contribution of corporate tax compliance to Kenya's total tax revenue has declined, posing challenges to the fiscal expectations of the Kenya Revenue Authority (KRA). Kenya Revenue Authority (KRA) has failed to reach fiscal expectations for corporate tax compliance despite numerous reorganization efforts aimed at doing so over the past few years. This study aimed to establish the effect of thin capitalization on corporation tax compliance among multinational corporations in Nairobi, Kenya. The theories that guided this study were: the Theory of Planned Behaviour and the Theory of International/Foreign Trade. The target population was made up of 218 multinational corporations in Nairobi, and a sample size of 141 respondents was determined by the Yamane formula. After response collection and tallying of the responses, 121 respondents correctly filled and submitted their questionnaires, indicating an 86% response rate. Questionnaires were used to collect primary data, and analysis included both descriptive and inferential statistics. The study found that thin capitalization had a negative and significant effect on corporation tax compliance (β = –0.288, p = 0.012). Based on the findings regarding the negative effect of thin capitalization on corporation tax compliance, policymakers should implement stricter debt-to-equity ratio limits and interest deduction caps in line with OECD recommendations. The current findings demonstrate that aggressive debt financing strategies significantly undermine tax compliance, suggesting the need for legislative reforms to close these loopholes. Future research should investigate the effects of corporate governance characteristics and organizational culture on corporate tax compliance.