Transfer Pricing and Income Shifting: Concepts, Pitfalls, and a Vision of the Future

Recently, transfer pricing (TP) regulation was introduced in Jordan for the first time in the country’s history (Income and Sales Tax Department [ISTD], 2021). This research evaluates the overall awareness of tax professionals on TP and its applicability in the early stage of its implementation. This is mainstream accounting research that adopts the quantitative research approach to collect data. In this context, a research questionnaire consisting of 29 items was designed and distributed to TP specialists to investigate four key aspects of TP applicability and impact. The results of the study revealed that the majority of respondents have a good level of understanding of the TP regulation and the concept itself. In terms of the applicability of TP, the results revealed that less experience in how to implement the TP regulation has been gained so far due to insufficient training. It was also indicated that digitalized systems have a significant role in filing TP transactions efficiently. According to the tax professionals’ perceptions, TP has been shown to have a possible influence on lowering the overall tax burden and tackling tax evasion, which leads to increased compliance with the tax law. Statistically, it has been revealed that the perceptions of the tax professionals in Jordan towards the awareness, applicability, and implementation of the TP regulation were not significantly differentiated according to their demographical and professional characteristics. Finally, this research concludes with practical implications and some recommendations for future studies

As barriers to cross-border trade and investment have fallen and business has become more globally integrated in recent years, many countries have become increasingly concerned about multinational enterprises (MNEs) shifting taxable income out of their jurisdictions into low-tax foreign jurisdictions. MNEs may do this by manipulating their transfer prices, which are the prices established for transfers of goods and services and the lending of funds between entities within the MNE. MNEs may also shift income by tinkering with the financial structure of MNE group members so that debt, and the associated interest expense, are shifted across borders. Income shifting can erode national tax bases and distort the financial and real investment decisions of MNEs. And countries may respond to these pressures by competing for tax base and capital in ways that exacerbate the distortions and further erode the taxation of company income. This chapter reviews the pressures and distortions created by income shifting within MNEs and examines how various policies may ameliorate or exacerbate these problems. Since income shifting inherently involves more than one country, policies of one country may create positive or negative spillovers for other countries, and international policy co-ordination may be necessary if such spillovers are to be properly accounted for. In reviewing policy responses to income shifting, particular notice will be given to the possibility and desirability of such co-ordination.

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

The article systematises methodological tools for making managerial decisions on transfer pricing. An analysis of domestic scientific works on the study of the list of methodological tools for determining transfer prices is carried out. It is found that transfer pricing researchers in the system of management accounting agree on a list of methods for determining transfer prices, including methods for determining transfer prices on the basis of market prices, on the basis of cost prices determined by marginal/standard/full costs or on a double basis, and on the basis of contract prices. Researchers of transfer pricing in the tax system are united in this approach and work with the methods (comparable uncontrolled price (as sales); resale price; "cost plus"; net profit; profit distribution) recommended by the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations and established by the Tax Code of Ukraine when checking the conformity of the terms of controlled transactions with the arm's length principle. Identify the conditions under which transfer pricing methods are used in domestic practice. The advantages and disadvantages of using certain transfer pricing methods are identified. To test and thoroughly analyse the transfer pricing methods, business operations of an agro-industrial enterprise are developed. The characteristics and limitations of the application of a particular transfer pricing method are identified. These transactions clearly illustrate the characteristics, advantages and disadvantages of using each transfer pricing method to verify the arm's length transfer price. The author demonstrates the need for adjustments in cases where the transfer price or profitability of a controlled transaction is not in line with the arm's length principle. The article emphasises the need for proportional adjustment of the tax base as a means of avoiding double taxation. Taking into account the systematisation of legal and regulatory provisions on transfer pricing, peculiarities, advantages and disadvantages of using certain methods, the author proposes a general scheme for making managerial decisions in the field of methodological management of transfer pricing operations.

This study examines the flexibility of multinational firms to adjust their income-shifting strategies—whether using transfer pricing or internal debt—during the tax year to react to affiliates' operating losses. We develop the concept that under flexibility, multinationals can adjust their inter-affiliate payments ex post (i.e., after financial outcomes are revealed, but before the end of the tax year) to minimize worldwide tax payments. Without flexibility, multinationals must commit to their affiliates' income-shifting strategies ex ante (i.e., before financial outcomes are revealed). Our central prediction is that under ex post income shifting, loss affiliates report lower transfer prices and internal leverage than profitable affiliates; under ex ante income shifting, affiliates report the same transfer prices and internal capital structure, regardless of making losses. Using novel data on direct transfer payments and internal debt of Norwegian affiliates, we find empirical evidence that transfer pricing, particularly related to user fees, but not internal debt, provides flexibility to adjust income shifting ex post. In additional tests, we confirm that our results reflect flexibility rather than loss affiliates' poor performance. Our study should interest tax policymakers and researchers by identifying how various mechanisms allow multinational firms to shift income when they face losses. JEL Classifications: F23; H25; H87.

Indonesia has recently updated its Advance Pricing Agreement and transfer pricing regulations in order to capture the development in the business and transfer pricing. It is also aimed to align with the Base Erosion and Profit Shifting (BEPS) recommendations. The new regulation has made substantial changes to the old advance pricing agreements (APAs) and transfer pricing regulations. With regards to transfer pricing, the new regulation has made some changes pursuant to the related parties’ definition, transfer pricing methods, comparability analysis procedures, special transactions, and intangibles. The transfer pricing guidance also provides guidance on the financial transactions and introduces the value creation concept. The new definition of related party is broader by providing more example on the ownership based on control. The regulation also allows the use of other transfer pricing methods other than the five OECD methods. Moreover, the intangible provisions have been modified to reflect the changes in the OECD Transfer Pricing Guideline 2017, to cover development, enhancement, maintenance, protection, and exploitation (DEMPE) activities and the economic owner. The guidance on financial transaction could also be useful for taxpayers and tax administration. Meanwhile, in terms of APA, the new regulation has provided a longer period of APA implementation, included a roll-back provision and modified the requirements regarding the submission of APA. Based on the new APA regulation, to submit an APA, a taxpayer cannot propose a lower profit than profit reported in the tax return. In general, the new regulation is in line with the BEPS 8-10 recommendations, albeit some differences are found, those are considered minor. The new regulations are expected to provide more certainty and simplicity for the taxpayers. Transfer pricing, APAs, Indonesia, advance pricing agreement, transfer pricing guidance, roll-back, related party, affiliated, transfer pricing methods, comparables

Indonesian tax authorities currently encounter a lack of cooperative compliance among companies engaged in transfer pricing practices with their affiliated entities across borders. Transfer pricing is commonly associated with tax purposes, such as tax planning or avoidance, which is considered standard practice for business entities. Hence, there is a significant necessity to assess and evaluate the prevalence of tax planning or avoidance through transfer pricing in multinational enterprises operating in Indonesia. To gauge the extent of transfer pricing used for tax avoidance purposes, this study examines the perspective of tax authorities on companies' transfer pricing optimization behavior. Employing a qualitative approach, the study aims to comprehend the utilization of transfer pricing and its implications. The findings provide insights into transfer pricing behavior within companies over time. According to tax authorities, companies are motivated by the benefits of transfer pricing, including revenue optimization, corporate profit allocation, and cost optimization. However, these practices are influenced by various factors that facilitate or constrain transfer pricing activities. Multinational enterprises demonstrate limited awareness of normative beliefs regarding international and domestic transfer pricing regulations. Notably, companies affiliated with large multinational enterprises, possessing a strong understanding of transfer pricing, exhibit a high potential for tax planning or avoidance through transfer pricing arrangements with related parties. These findings contribute to the existing body of research on transfer pricing practices from the perspective of tax authorities as part of the Indonesian government.

Purpose – The purpose of this paper is to introduce transfer pricing to a broader community of business leaders who might not be familiar with the importance of this concept. Transfer pricing is a term used to describe inter-company pricing arrangements relating to transactions between related business entities. These can include transfers of intellectual property, tangible goods, services, and loans or other financing transactions. Why is Transfer Pricing Important? The potential for US federal business tax reform and the rigorous pursuit of transfer pricing adjustments by foreign countries are among the top global tax concerns facing senior US tax professionals. Design/methodology/approach – General viewpoint based upon years of consulting work on the topic. Findings – The relevance and importance of transfer pricing is emphasized to a larger business community. Practical implications – This is an excellent introduction to the topic of transfer pricing. Originality/value – The paper is valuable in that it can be read and appreciated by a wide range of audiences.

It has been concluded that the concept “transfer price” means the price generated by multinational corporations in the process of commercial activity between the affiliated companies located in different countries and, correspondingly, different tax jurisdictions. The potential use of international transfer pricing as an income shift by multinational enterprises has long been recognized. Many tax-related scandals have been made public in the past few years involving some of the major multinational enterprises at this time. These were accused of practicing tax avoidance on an industrial scale by shifting profits to lower-tax jurisdictions through transfer pricing techniques. Multinational enterprises perform intra-firm transactions with foreign related parties to shift taxable profits by manipulating internal transfer prices. This bibliometric review of the literature we proposed aimed to summarize existing research, recognize patterns, problems, and identify the conceptual content of the field, contributing to the existing theory.

Transfer pricing attracts considerable attention by the tax authorities these days. Out of fear for multinational enterprises (MNE) manipulating transfer prices to reduce their total tax burden, the authorities have strengthened the fiscal rules and have augmented the number of transfer pricing audits undertaken. The fiscal rules are built around the 'arm's length principle', which is widely accepted as the international yardstick to ensure fair transfer prices in each jurisdiction. In this paper, we investigate whether the need to comply with the arm's length principle in the fiscal requirements influences the role of transfer pricing as an instrument within the management control system and how MNEs cope with potential tensions that can arise between both aspects. In line with a number of domestic transfer pricing studies (Spicer 1988, Van der Meer-Kooistra 1994, Colbert and Spicer 1995), Transaction Cost Economics (TCE) (Williamson 1979) serves as the broad theoretical framework for this study. Williamson's version has been extended by explicitly incorporating MCS aspects and processes/dynamics (Ghoshal and Moran 1996, Boyns et al. 1999, Covaleski et al. 2003). The 'transactional' level is the main unit of analysis. Under the TCE approach the choice of the governance system for a certain transaction is determined by transaction and production cost minimising. TCE therefore justifies the use of different conditions, including a different price, for internal versus open-market transactions. However, the arm's length principle forces MNEs to account for all internal transactions at a price that would be used under market governance (Piciotto 1992, Eden et al. 2001). The transactions under investigation consist of a series of cross-border transfers of three different types of products in the context of one MNE. Design and analysis of the three case studies are based on Eisenhardt (1989), Yin (1994) and Miles and Huberman (1998). In addition, the analysis is supported by the computer package NU*DIST N5. A first conclusion of the study is that the fiscal 'arm's length' transfer pricing methods do not create tensions between the fiscal role and the MCS role of transfer pricing. When the MNE motivates the prices it applies with a detailed functional analysis, national tax authorities are accepting them in an increasingly flexible way. The reasoning behind the functional analysis is in accordance with TCE: the functions, risks and assets under investigation match the concepts of complexity/uncertainty and asset specificity. TCE constructs can therefore explain the use of transfer pricing methods for MCS. A second conclusion is that the tension between the arm's length principle and the internal governance of transactions depends on the strategic focus of the product being transferred. The tension is higher for unique processes and products, while it can be solved for standard products that are available on the market and for which the MNE focuses on cost competitiveness.

The study was conducted with the aim of analyzing the influence of transfer pricing, return on assets, leverage, firm size, and tax haven on income shifting (an empirical study of energy sector companies listed on the Indonesia Stock Exchange from 2019-2022. The method used a quantitative method with an explanatory research type. The populations selected of the study are all Energy Companies listed on the IDX from 2019-2022 by totaling 75 Companies. The sampling technique of the study used a purposive sampling technique. The data analysis method used panel data with the Eviews software program version 10. The study found that transfer pricing has no effect on income shifting, return on assets has effect on income shifting, leverage has effect on income shifting, firm size has effect on income shifting, and tax haven has effect on income shifting in energy sector companies listed on the IDX for the period 2019-2022.

This paper examines tax-induced income shifting behavior among the affiliated firms in the Korean business groups (chaebol). Korean corporate income tax law does not require consolidated tax returns, and business groups with a large number of affiliated member firms have incentives to shift income across member firms to reduce overall taxes of the group. Korean chaebols provide a good experimental setting to explore within-jurisdictional income shifting because, under the peculiar governance structure of chaebol firms, business decisions for each affiliated firm are coordinated by the controlling owner-manager of the group, so a coordinated strategy among the affiliated firms can be utilized to reduce overall tax burdens for the group as a whole. For a large number of Korean companies that are subject to external audits, we perform univariate and multivariate regression analyses on income shifting behavior of chaebol firms compared with non-chaebol control firms. Our evidence supports tax-motivated income shifting activities of chaebol firms. The extent of income shifting is found to depend on its effect on nontax cost factors such as earnings, leverage, and cash flow rights of the controlling shareholders. We also find that income shifting occurs mainly through operating rather than nonoperating income, suggesting that transfer pricing could be a likely channel for income shifting. Furthermore, we do not find much difference in income shifting activities across chaebol groups, and the endogeneity test supports the chaebol's income shifting activities even after controlling for the variables endogenous to the chaebol affiliation. Our study provides some insights on the within-jurisdictional income shifting activities where research is limited.

The three main objectives of a domestic transfer pricing system are: (1) the attainment of goal congruence, (2) the facilitation of fair divisional performance evaluation and (3) the promotion of divisional autonomy.The transfer pricing objective considered most important in practice by large listed South African industrial companies is the facilitation of fair divisional performance evaluation. Objectives relating to simplicity and ease of application are also rated more highly than goal congruence, which is somewhat surprising based on the review of current literature.The domestic transfer pricing methods used by large listed South African industrial companies are fairly evenly split between cost and non-cost-oriented methods. The most frequently used primary transfer pricing method is market price. The use of mathematical programming and economic marginal cost prices is practically non-existent. These findings are consistent with the findings of some recent overseas studies.Policies relating to the selection of the transfer pricing method, the purchase of intermediate goods and services and the settlement of transfer pricing disputes reflect some head office management involvement in the transfer price decision process in most cases.Three organisational variables appear to have a significant association with a firm’s choice of transfer pricing method. Firstly, companies with a low level of interdivisional trading use non-cost-oriented transfer pricing methods whereas companies with a high level of interdivisional trading use cost-oriented methods. Secondly, transfer pricing methods selected as a result of some head office management involvement tend to be cost-oriented whereas methods selected by the divisions themselves tend to be non-cost-oriented. Thirdly, cost-oriented methods tend to be used in companies in which transfer pricing disputes are normally settled by some form of head office intervention and non-cost oriented methods are used in those companies in which disputes are normally settled by the divisions themselves.

This study analyses the influence of Foreign Tax Credit (FTC) Limitations and Income Shifting on the taxation strategies of multinational companies using the Systematic Literature Review (SLR) method. This study categorises findings from 20 scientific articles into three main groups: research supporting the significant influence of FTC Limitations and Income Shifting on tax strategies, research finding no strong relationship between the two, and research identifying other factors contributing to multinational companies' tax planning. The results indicate that FTC Limitations encourage companies to use Income Shifting strategies to reduce their global tax liabilities. Practices such as transfer pricing, thin capitalisation, and the use of tax havens are often used to optimise tax payments. However, some studies indicate that domestic tax policies, corporate ownership structures, and international accounting standards also play an important role in corporate tax decisions. In addition, the lack of coordination in tax policies between countries creates loopholes that allow companies to exploit tax arbitrage

Transfer pricing is a real challenge for both tax regulators and multinationals who use this procedure, in most cases to erode the tax base. The purpose of this paper is to analyse the tax practices and regulations of countries applying OECD transfer pricing regulations. To this end, the profiles of 69 countries on the application of transfer pricing regulations and methods of assessing the transfer pricing file have been analysed. The research results indicate that countries with developed economies and high tax burdens have more rigid transfer pricing tax regulations, the aim of which is to prevent tax evasion through transfer pricing. At the same time, emerging economies with a more lenient tax system do not pay particular attention to transfer pricing, but provide clear regulations on the methods of assessing the transfer pricing case. At the other end of the spectrum there are weakly developed countries, which apply OECD transfer pricing regulations but are flawed in their practical application. The results of the research are of real use both to national and international regulators and to multinationals applying transfer pricing in intra-group transactions.