Transfer Pricing: Increasing Tension between Multinational Firms and Tax Authorities

Abstract

Transfer pricing taxation is a significant source of tension between Multinational Firms (MNFs) and tax authorities. The tension relates to the different perspectives of MNFs and tax authorities. MNFs view taxes related to transfer prices as costs to avoid. On the other hand, regulators and tax authorities view taxes related to transfer pricing from the perspective of making sure that MNFs pay their fair share of taxes to the country or territory where MNFs generate profits. Previously, the U.S. was the primary world leader in the area of transfer pricing taxation. The Organization of Economic Cooperation and Development (OECD) have replaced the U.S in this role. The new OECD project titled Base Erosion and Profit Shifting (BEPS) will dramatically change transfer pricing taxation, on a worldwide basis. It also has the potential to affect change in foreign direct investment (FDI). These changes will take place in both developed and underdeveloped countries. This article informs regulators, tax authorities, MNF management, academics, and tax professionals about several major emerging issues related to BEPS. The article also informs accounting and taxation academics about future research needs in this area.

Keywords: Transfer Pricing, Tax Avoidance, Multinational Firms, Tax Regulation

JEL Classification: F23, H26, K34, M48