The Transfer Pricing Problem: When Multinational Corporations Shift Profits Across International Borders

Abstract

The transfer pricing problem arises where corporations are divisionalised and have responsibility centres operating as strategic business units, a situation that presents challenges in determining suitable prices for intra-group transactions. The transfer pricing problem becomes even more critical where a company has subsidiaries spread throughout the world, in countries that have varying tax rates. Under this situation, it is common for multinational corporations to attempt to minimise their tax liabilities by shifting profits from higher tax countries to lower tax regimes. This practice is highly detested by tax authorities, the world over, and international efforts are underway to develop measures to stop it. One of the methods being tried involves the use of Advance Pricing Agreements (APAs), which have so far proven ideal in minimising disputes between multinational corporations and tax authorities.

Keywords: transfer pricing, profit shifting, market based transfer prices, cost based transfer prices, dual prices, two-part tariff, advance pricing agreements