International Transfer Pricing: Pointers Towards Balance of Payment Issues of an Economy

Abstract

Balance of Payment (BoP) deficit is become a challenging task for the policy makers to manage. Tax differentials have significant impact on the trade deficits, is well proved through research. It is also known fact that the international transfer pricing is used as a strategy by the multinationals. Transfer pricing is looked as an issue of dispute between rightful tax to the governments and freedom of the multinationals for maximizing profits and strategy implementation. However transfer pricing has greater economic impact than mere taxation issues. It has larger impact on the balance of payment of the nation. The adjustment to the arm’s length price by the tax authorities implies probable impact on the BoP. With specific focus on the current account transactions of the BoP, this study focuses on the impact transfer pricing can have on the BoP. It is found that there is a significant impact of international transfer pricing on BoP.

Keywords: Transfer Pricing, Balance of Payment, Current account transactions, Trade Deficit, Balance of Payment Crisis

JEL Classification: F23, M21, H29, F32