Study on transfer pricing strategy of intermediate products for Multinational Corporation (MNC): Tax avoidance

Abstract

Given the context of economic globalization, the free flowing of capital and technology among the open markets is the common status for the current cross-nation economic connections. That Multinational Corporations (MNCs) have established subsidiaries in different countries and markets is the main manifestation of the free flowing of capital and technology. Undoubtedly, pricing the intermediate products which flow among the subsidiaries is one of the main decision-making goals. But the differences in each county's tax rate weighs considerably important when MNC are pricing the intermediate products of their subsidiaries. This paper, based on the linear demand functions and no external market existing in intermediate products of subsidiaries, first introduces differential tax rates of different markets and economies into MNC's intermediate product pricing. Then it does some studies on transfer pricing methods of intermediate products and finally comes to the conclusion that MNC is able to reach reasonable tax avoidance and its corporation's overall profits maximization by the transfer pricing method proposed in this paper.