A Further Examination of Income Shifting Through Transfer Pricing Considering Firm Size and/or Distress

Abstract

This study evaluates the effect of firm size on income shifting between tax jurisdictions through the use of transfer prices both before and after the passage of the Tax Reform Act of 1986 (TRA86). Prior research addressing income shifting through transfer pricing analyzes larger, financially sound firms. This empirical study extends the transfer pricing literature by including smaller and in some cases financially distressed firms in the sample and testing the effect by firm size on income shifting. Our findings suggest that smaller and/or distressed firms are less likely to shift income through transfer pricing than larger firms.