Implementation and enforcement of transfer pricing regulations should improve tax revenue growth in Nigeria. Is this true? Does institutional capacity have a role?

Purpose: Multinational corporations' questionable profit-shifting practices have become commonplace, necessitating immediate attention to transfer pricing laws if the government is to fulfill its mandate to its citizens. Furthermore, it is imperative that the state develop capacity such as strategic planning and human resource capabilities that can ensure that the implementation of transfer pricing regulation explains a significant improvement in tax revenue for the government. Hence, this study examined the mediating effect of institutional capacity on the interaction between transfer pricing regulation and tax performance in Nigeria.

Methods: A validated questionnaire was employed to gather data from 612 staff members of the federal inland revenue service who work in the international tax department. A partial least-square-structural equation model was used to examine the three-way mediation hypotheses.

Findings: The findings indicate that the specific indirect effect of institutional capacity on transfer pricing regulation's tax revenue performance is significant enough to suggest a full mediating effect (?= 0.286, t = 2.211, p = 0.028). The study concluded that the effect transfer pricing regulations have on tax performance for FIRS in Nigeria is explained by its institutional capacity to plan and human resources to implement.

Limitations: This study in scope is restricted to the FIRS in Nigeria and due to the study's cross-sectional nature, it is impossible to draw reasonable conclusions about the long-term effects of transfer pricing legislation and institutional capacity on tax performance.

Contribution to knowledge: The study contributes to recent empirical submission on transfer pricing regulations in Nigeria. Likewise, offer the boundary conditions to explain how transfer pricing regulation affect tax performance. The complementary role played by public interest theory of regulation and the dynamic capacity theory in serving as the theoretical underpinnings for this study is another contribution to knowledge.

Practical Implication: The practical implication of the findings of this study for the management of FIRS in Nigeria is that it offers strategic information which confirms the relevance of transfer pricing regulation as a critical tool to address the challenges of profit shifting by multinational companies.

Social Implication: Likewise positioned institutional capacity as the precondition for transfer pricing regulation to bear improved tax revenue. Understanding that institutional capacity mediates transfer pricing regulation-tax performance linkage suggest that with improved tax revenue, the society should benefit via increased revenue allocation to create public goods.

Originality: This study’s originality stem from the fact that it is amongst the rarest study that established the effect of transfer pricing regulations on tax profit post reform and the first study within transfer pricing literature that found relevance for institutional capacity as a mediating factor.