Study note on transfer pricing

Study note on transfer pricing

References with extracted contents

Mário Marques & Carlos Pinho (2016) "Is transfer pricing strictness deterring profit shifting within multinationals? Empirical evidence from Europe", Accounting and Business Research, 46:7, 703-730 [DOI: 10.1080/00014788.2015.1135782].

"Intra-company prices must be subordinate to the arm’s length principle. This principle requires that transfer prices between associated companies should be the same as if the companies involved were unrelated, not part of the same corporate group. Transfer prices, and consequently taxable income, are adjusted for tax purposes if the prices are not arm’s length prices. Most countries adhere to this approach in order to mitigate double taxation and also to curb losses of tax revenue";

"There is extensive literature that provides indirect evidence of significant cross-border profit shifting activities (for surveys, see e.g. Hines 1999, Devereux 2006, Heckemeyer and Overesch 2013). Huizinga and Laeven (2008), for instance, found that the ratio of profit shifting to the tax base is estimated to be 13.6% in Germany and 4.8% in Portugal";

"The widespread use of tax-planning strategies with serious implications for the erosion of the tax base has been moving up political agendas and has led governments to increase their scrutiny of tax avoidance by multinational companies. Many countries have introduced anti-tax-avoidance regulations to prevent multijurisdictional companies from strategically reporting earnings in lower-tax countries. The anti-avoidance measures that have been enacted include transfer pricing regulations, rules limiting the tax deductibility of internal debt (e.g. thin-capitalization, earnings-stripping rules and allocation rules) and provisions to prevent multinationals from shifting highly mobile passive income to lower-tax countries";

Alessandro Mura & Clive Emmanuel (2010) "Transfer pricing: early Italian contributions" Accounting, Business & Financial History, 20:3, 365-383 [DOI: 10.1080/09585206.2010.512717].

"In the Anglo-Saxon literature the attention towards the subject of transfer pricing first intensified during the 1950s, in the field of both accounting and economics (Cook 1955; Dean 1955; Hirshleifer 1956, 1957). The catalyst behind this interest was generated by the managerial innovations introduced into large American companies at that time (Dearden 1967, 99; Sharav 1974, 56). The adoption of decentralization – which implies the establishment of operating activities as profit centres – coupled with the delegation of autonomy to managers, raised the need for new managerial control systems. The point was to assess the performance of both profit centres and their managers, while guaranteeing decisions made at a divisional level were in line with corporate interest: the so called goal and behavioural congruence";

"In Villa’s view, the objective of record keeping is ‘to follow all movements and changes in net assets and to know the amount of the expected revenues and expenses which are effectively collected and paid during the administrative period’ (1853, 133). This broad perspective enabled Villa to become aware of the organizational and accounting issues peculiar to divisionalised enterprises, at least at an embryonic level, even though the Italian economy of the time was mainly based on agricultural and mercantile activities, there being very few cases of industrialization, except in the northern regions (Amaduzzi 2004, 143; Basini 1999, 115–23), and with a limited use of decentralization";

Cecchini, M., R. Leitch and C. Strobel. 2013. "Multinational transfer pricing: A transaction cost and resource based view" Journal of Accounting Literature 31, Elsevier: 31-48.

"Multinational enterprises (MNEs), by their very nature, have advantages and disadvantages. A major advantage (and thus major motivation) is that operating in many countries provides the opportunity to exploit structural market imperfections for competitive advantage. However, this potential advantage can only be realized if the entities that comprise the MNE are well-coordinated. In cases where coordination is not achieved, a MNE can become unwieldy, providing limited advantage. Transfer pricing policy can help a MNE take advantage of complex international market imperfections while managing costs and risks";

"Transfer pricing refers to the prices placed on goods, services, and intangibles as they move between economic entities of a MNE. Transfer pricing policy is particularly difficult for a MNE because they need to not only determine a transfer price that is in the best interest of the organization and the individual entities in the value chain, but also one that will satisfy the regulatory requirements of host countries where foreign divisions are located. This problem is compounded by the decision of where to locate worldwide resources in order to exploit market imperfections and maximize the organization’s value chain. These decisions will be determined by the nature of the product created, market structure, environmental factors including tax policies, relative power and dependence among entities, governance procedures, socioeconomic and geopolitical risks, transaction risk, and the nature of the resources used to create value";

Peter J Buckley & Jane Frecknall Hughes (1997) "Japanese transfer pricing policy: a note" Applied Economics Letters, 4:1, 13-17 [DOI: 10.1080/758521824].

"In the past three years, the financial press has devoted a good deal of coverage to the alleged use of transfer pricing policies by multinationals to gain a tax advantage. Such a tax advantage accrues because different countries may constitute tax havens or because the overall tax may be lower for a variety of reasons, thus resulting in higher profits (and taxes) in the home country of the parent/holding company or a third country, which thereby benefit from the use of another country's resources";

"The issues of pricing in a decentralized uni-national company are well known and are analysed by Hirshleifer (1986). The problem occurs when a company taxable under one jurisdiction (company 1) allegedly sells products at an inflated price to another company under common control (company 2), this latter company being taxable under a different jurisdiction. Company 2 thus pays a higher price than it would if it had purchased the same products from an external unconnected third party, and consequently makes lower profits, and company 1's profits are therefore higher..... The concern of the Revenue authorities is that the payment of any inflated purchase price siphons profits back to an overseas jurisdiction";

Sikka, P. and H. Willmott. 2010. "The dark side of transfer pricing: Its role in tax avoidance and wealth retentiveness" Critical Perspectives on Accounting 21, Elsevier: 342-356.

"Since costs and overhead allocation mechanisms are highly subjective corporations enjoy considerable discretion in allocating them to particular products/services and geographical jurisdictions. Such discretion can enable them to minimise taxes and thereby swell profits by ensuring that, wherever possible, most profits are located in low-tax or low risk jurisdictions";

"Given the importance of transfer pricing in relocating corporate profits, facilitating tax avoidance and the flight of capital, and its implications for the distribution of wealth and public goods ..., the Head of the US Inland Revenue Service (IRS) has described transfer pricing as “one of [its] most significant challenges” (The Times, 12 September 2006). Arguably, there is significantly more to transfer pricing than refinements of techniques and a study of US corporations concluded that “transfer pricing may be playing an important role in aggregate national accounting, potentially reducing the reported value of exports and the current account (and thus GDP)";