Transfer Pricing: A Tax Avoidance Tool of Multinational Corporations

Abstract

The main thrust of this study is to examine how Multinational Corporations (MNCs) use transfer pricing practices to reduce taxable profit with a view to recommend how such practices could be minimised, to enhance the tax revenues of their host countries. This was done empirically using various studies on transfer pricing and taxation. The study concludes that various MNCs take advantage of different tax rates charged in different jurisdictions to minimise the groups’ tax liabilities. This is done by using transfer pricing practices to shift profit from high-tax jurisdictions to low-tax jurisdictions. Multinational corporations as integrated entities exploit international differentials and generate integration economies by setting transfer prices that are unlikely to be the same prices arms length parties would negotiate. Tax authorities should be aware of the need to publish documentations requirements concerning transfer pricing, so as to improve on monitoring of MNCs transfer pricing compliance. Transfer pricing must be provided to tax authorities for computation of both border, and corporate income taxes. This is necessary since the activities of MNCs cut across national borders.

Keywords: Transfer Pricing, Multinational Corporation, Taxation

JEL Classification: M14