Transfer Pricing Manipulation Research Articles

Investigating the international corporate tax revenue efficiency under the digital economy: multiple case study of MNES operating in India

Purpose The purpose of this paper is to validate the theoretical finding that digital MNEs avoid physical presence norms of permanent establishment and royalty characterization rules for business and royalty taxation, respectively, to escape tax incidence in the market economy, using information, communication and technology features and transfer pricing (TP) manipulations. Design/methodology/approach Multiple case studies of MNEs from technology sector, based on judicial decisions in 141 cases, over taxability of profits earned from Indian economic activities. Additional in-depth case study of the Uber Group to study the tax avoidance structures under platform economy, by routing of Indian profits through The Netherlands, a tax haven. Findings The study finds a significant number of digital MNEs earning profits from India and avoiding tax by defying physical presence and royalty characterization. In majority of the cases, demand-side business activities are discharged through incorporating and remunerating affiliates at cost plus low markup, thus avoiding tax incidence, using TP manipulations under the arm’s length principle applied by governments for benchmarking the intragroup transactions of the MNEs. Research limitations/implications The research findings validate the view that digital features promote tax avoidance in the market economy. Originality/value The originality of the study lies in the validation of profit shifting through digital features from the developing market economy and portending that digital MNEs defy physical presence to avoid business taxation through TP manipulations.

Aggressive tax planning as a threat to national security

The article examines the strategies of aggressive tax planning as a threat to state security. Aggressive tax planning practices are becoming more common. This poses multifaceted challenges to fiscal policy, economic stability, and national security. By conducting a comprehensive analysis of applied strategies, economic impacts, and potential policy measures, this study aims to provide information on the complex mechanism of tax evasion. The article discusses various strategies that companies use in aggressive tax planning. These strategies cover offshore tax havens, transfer pricing manipulation, royalty movement, "fine capitalization" and tax deferral, each of which uses legal nuances to minimize tax liabilities. The study examines the economic consequences of aggressive tax planning, focusing on significant revenue losses for governments around the world. Eroding tax revenues through aggressive tax planning reduces states ' ability to finance basic public services, contributing to budget deficits and economic instability. In addition, it creates material inequality, contributes to social unrest, and jeopardizes the nation's ability to solve national security problems. By analyzing these economic implications, this study highlights the urgency of considering aggressive tax planning as a fiscal and national security issue.

Multinational Corporations transfer Pricing Policies and Economic Growth in Nigeria

With Nigeria's abundant natural resources the control of a substantial portion of oil production by multinational corporations (MNCs) raises concerns about transfer pricing manipulation. Part of revenue leakages of the government in Nigeria which are needed to boost economic growth can be attributed to tax evasion practices by MNCs through their transfer pricing activities. Studies that focused on tax evasion practices of MNCs such as sharp practices in the area of transfer pricing practices in Nigeria are scarce. This study examined the effect of multinational corporations transfer pricing policies, corruption and economic growth in Nigeria from 1986 to 2022. The study adopts an ex-post factor research design, utilizing an autoregressive distributed lag modelling and bound testing cointegration as the estimation techniques. The inferences were made at 5% significant level. The inferences were made at 5% significant level. The findings revealed that domestic non-oil revenue shows a significant and positive effect on Gross Domestic Product, suggesting a potential positive association between domestic non-oil revenue and Gross Domestic Product over the long term. In the short run lagged differences in Gross Domestic Product exhibit a positive and marginally significant coefficient, suggesting a persistence effect. In conclusion, in the examination of transfer pricing policy on Gross Domestic Product, the long-run estimates reveal a significant effect of transfer pricing on Gross Domestic Product (Adj. R2= 0.229, F (4,37) = 30.94, p< 0.05)), The study concluded that transfer pricing contributes valuable insights to the on economic growth in Nigeria. The study recommended that policy maker should center on promoting transparency and fairness in multinational corporations' transfer pricing practices through the implementation of stringent regulations and monitoring mechanisms, collaboration between domestic and international tax authorities to detect and deter potential manipulations, and the fostering of international cooperation to establish standardized guidelines, aiming for an equitable and consistent approach across jurisdictions.

Manipulation of transfer prices by multi-national companies in Nigeria

Background: Transfer pricing manipulation diminishes revenue generation by the host countries. The results of the investigations in the literature show divergence to the extent of the impact of transfer pricing on economic growth in both the low- and high-tax countries, especially as this type of investigation is still scanty in the literature.Aim: The study examines the effect of transfer pricing manipulation on economic growth in Nigeria.Setting: Multi-national companies in Nigeria.Methods: The auto-regressive distributed lag (ARDL) approach was applied to data from Nigeria between 1986 and 2019.Results: The findings reveal an insignificant relationship between economic growth and explanatory variables such as transfer pricing manipulation, unemployment rate, government revenue and trade openness. The result also shows a significant negative relationship between the exchange rate and economic growth.Conclusion: The study recommends that the government should implement proper monitoring of multinational companies to check their day-to-day transaction activities. This may help the government to generate more revenue, and serves as an avenue to create more employment opportunities.Contribution: In this study an important aspect is indicated in that multinational companies often misuse revenue to gain undeserved profits, rendering unnecessary costs to market and rendering other companies less competitive, as well as exploiting buyers and consumers. This is an important loophole that law- and policymakers as well as governments should pay attention to and act against.

Transfer Pricing Manipulation and Economy: Evidence from Nigeria

Transfer Pricing Manipulation and Economy: Evidence from Nigeria

ПОДАТКОВІ МЕХАНІЗМИ ДЕТІНІЗАЦІЇ ГЛОБАЛЬНОЇ БІЗНЕС-ДІЯЛЬНОСТІ

The high level of shadowing of the world economy and its highly destructive impact on all spheres of human life make the diversified toolkit of de-shadowing of business activities one of the priority mechanisms for stimulating global economic development. Its strategic goals are primarily related to the formation of favorable organizational, economic, institutional and tax conditions for compliance by economic entities of various countries with strict requirements regarding the transparency of financial and economic activities and the movement of funds in bank accounts, combating the illegal withdrawal of funds abroad and "laundering » of the tax base, laundering of "dirty" money and shifting of corporate profits to low-tax jurisdictions, as well as manipulation of transfer prices for intra-company supplies of goods and services. At the same time, a full-fledged and systematic detinization of the global economy is impossible without the simultaneous implementation by countries of a diversified toolkit of interstate cooperation in this area with the aim of improving the mechanisms of taxation of extraterritorial activities of companies and firms, including with the use of digital technologies. In our opinion, it is the set of measures mentioned in the article that can bring the system of detinization of global business activity to a qualitatively higher level of development and eliminate its inherent methodological flaws and shortcomings. At the same time, the highest effect of detinization can be achieved exclusively on the basis of the comprehensive implementation by countries of organizational and economic, institutional and tax instruments at the national and supranational levels with the simultaneous application of moral and reputational influence on fiscally dishonest economic subjects. At the same time, the extraterritorial nature of the activities of modern multinational companies and their widespread use of digital technologies also brings to the fore the issue of a deep qualitative reorganization of the current system of global tax management in order to counteract the "erosion" of the tax base and cross-border financial speculation, as well as to ensure a fairer distribution of global tax revenues between states and world regions.

Indonesian Case: Good Corporate Governance, Company Size, Taxes, and Transfer Pricing

ge companies have tax deficiencies and will inevitably use more aggressive transfer pricing manipulations. GCG and company size can influence company decisions in making transfer pricing. This research is fundamental to developing a model and conceptual coding and causality of transfer pricing practices while testing the influence of motivational factors on transfer pricing. The problem in this study is that Good Corporate Governance (GCG) strengthens the effect of taxes on transfer pricing in multinational companies, and apakah of company size weakens the influence of taxes on transfer pricing in multinational companies. This type of research is explanatory research using data from 2010-2020. The type of data used in this study is secondary data in the form of financial statements of manufacturing companies published by the Indonesia Stock Exchange obtained from the IDX Fact Book and OJS. The population in this study, namely all multinational companies in the manufacturing and services sector listed on the KOMPAS 100 index on the Indonesia Stock Exchange (IDX), amounted to 100 companies. The sample was based on purposive sampling, so 48 companies were selected. The data collection technique in this study is documentation. This study used a simultaneous equation model for panel data analysis and the Granger causality test. Based on the results of the study, it can be concluded that 1) The role of GCG in strengthening the influence of taxes on transfer pricing is significantly indicated by the p-value test t variable moderation GCG *tax of 0.000 < 0.05; 2) The role of company size weakens the effect of taxes on transfer pricing significantly, indicated by the p-value test t variable moderation size *tax of 0.000 < 0.05.

THE ARM’S LENGTH PRINCIPLE: A PANACEA OR PROBLEM TO REGULATING TRANSFER PRICING TRANSACTIONS BY MNES IN DEVELOPING COUNTRIES

Transfer pricing manipulation by multinational enterprises is a big problem in developing countries, considering the increased levels of tax avoidance and evasion in these countries. The revenue lost through evasion and avoidance schemes as well as through aggressive tax planning robs developing countries of the much-needed domestic revenues to fund public expenditure. The repercussions of revenue inadequacies are evident in developing countries’ governments to adequately invest in education, tax administration, health and security, infrastructural development, and economic development. Most developing countries having enacted transfer pricing regulation, with the arm’s length principle are at the core of these regulations. This principle has been criticized in literature for its inefficiency and ineffectiveness in regulating transfer pricing in evolving economic times, while some researchers continue to maintain its relevance. In view of the conflicting views on the cogency of the arm’s length principle in developing countries, this paper sought to unpack this debate through an evaluative review to show the areas of disagreement and agreement among scholars. The review was motivated by the continued concern and discussions of tax evasion and avoidance by multinational enterprises through aggressive transfer pricing in developing countries. Through a critical literature review, this article assesses the applicability and relevance of the principle in developing countries. Findings reveal controversies in the availability of comparable data, continued abuse of transfer pricing as well as the difficulty in applying the principle in digital transactions and intangibles.

Tax Avoidance Strategies of Multinational Companies: A Case Study of Apple Inc.

This study concentrates on the tax avoidance strategies of multinational companies using the case study of Apple Inc. Objectives of the analysis include identifying strategies that could be exploited by multinational companies to avoid taxes and to find improvements for the Sri Lankan tax system based on the loopholes that multinational companies could exploit. The methodology consists of a critical analysis based on literature and secondary data. Findings of the study include thin capitalization, manipulation of transfer prices and royalty payments, Double Irish Arrangement and Dutch Sandwich, tax inversion and cost sharing agreements as some of the tax avoiding strategies used by multinational companies. Recommendations of the study applicable for the Sri Lankan context include addressing the loopholes of the tax system by implementing country-by-country reporting at least for the companies headquartered in Sri Lanka, a common reporting standard for all the companies, formulate and implement Controlled Financial Corporation rules and to limit certain incentives including tightening of foreign dividend income regulations.

Correlation between misinvoicing and non-tariff measures for Turkey's exports to the EU

AbstractMany researchers have analysed the factors that cause discrepancies in the mirror trade statistics. However, the conflicting findings of the relatively limited number of studies on the relation between non-tariff measures and misinvoicing make further research in this area necessary. Therefore, our paper aimed to analyse the impact of non-tariff measures on misinvoicing in the context of Turkey's exports to the European Union (EU) between 2008 and 2015. This study tested the possible relationship between them using other measurable variables related to Turkey's exports to the EU of the products to which the non-tariff measures were applied. This has been done by employing the dynamic generalized method of moments (GMM) as well as the quantile regression (QR) models. It was observed that tariffs, along with non-tariff measures, have negative relationship with the misinvoiced amount. Additionally, it is also observed that the transfer price manipulation appears to be a means of corporate tax evasion. This finding aligns with the decrease in reported imports and the decrease in the perceived levels of corruption.

Income shifting and U.S. international trade in goods statistics

Intrafirm trade represents greater than one-third of total U.S. international trade in goods. Since these are not arm’s-length transactions, trade policymakers have voiced concerns that income shifting may distort international trade in goods statistics through the manipulation of transfer prices. Using country-level data on intrafirm exports and imports, we estimate a path analysis that simultaneously tests how and to what extent tax-motivated transfer pricing and real investment decisions affect intrafirm trade in goods statistics. Contrary to speculation, we do not find an economically significant relation between transfer pricing and intrafirm trade in goods statistics. In contrast, we find that tax-motivated location decisions create a 21 (20) percent or $819.7 ($927.1) million difference in mean intrafirm exports (imports) between the U.S. and a low- and high-tax country. This study provides trade policymakers with relevant information about the extent to which real investment decisions and accounting manipulations affect intrafirm trade in goods statistics and contributes to the international trade and income shifting literatures.

How Does Profit Shifting Affect the Balance of Payments?

Profit shifting by multinational enterprises—through manipulation of transfer prices of related-party trade, intragroup lending, or the location of intangibles—affects international flows, raising the question of its impact on the current account and external balances. This paper approaches this question theoretically and empirically. In theory, profit shifting distorts the components of the current account and bilateral current account balances but leaves a country’s aggregate net balance unaffected. There is, however, a real effect on current account balances, because taxes are paid to different jurisdictions. Moreover—in practice—the measured current account could change, because not all transactions are equally easy to track. Our panel empirical results broadly confirm that the current account balance tends to be, on average, unaffected by profit shifting, but taking heterogeneity into account we find that both the real tax effect and mismeasurement strengthen income balances—and thus the current account—in investment hubs.

An exposition of transfer pricing motives, strategies and their implementation in tax avoidance by MNEs in developing countries

The abuse of transfer pricing by multinational enterprises (MNEs) is a topical issue the world over. Abusive transfer pricing results in the erosion of tax bases and profit shifting from countries with high tax rates to those with lower tax rates, thus enabling tax avoidance and evasion. Developing countries are argued to suffer most under the negative impacts of transfer pricing manipulation. This study investigates the strategies employed by MNEs to minimise their tax burden in developing countries. An understanding of the motives and strategies is fundamental in tax policy crafting and improvements that effectively respond to transfer pricing. Adopting the interpretivist research philosophy with the use of in-depth interviews with tax officers, tax consultants and Ministry of Finance Officials, the study established that amongst the transfer pricing schemes used by MNEs in Zimbabwe, the predominant one was the use of service fees. The most notable being management fees, this was a contribution to knowledge as this strategy was found to be scarcely discussed in literature and there was very little empirical evidence to back its existence. The study recommended use of targeted approaches by the revenue authority to minimise revenue losses through intragroup services. The findings serve as vital information for policymakers, revenue authorities and tax auditors.

Advance Price Agreement: An Option to Reduce Controversy Between Multinationals and Tax Administrations

This paper explores the disparities existing between multinational corporations (MNCs) and tax administrations in terms of transfer pricing strategies. Because transfer pricing is actually considered the main tax issue in the international taxation, tax authorities’ regulations have an important role when it comes to transfer pricing policies. In one hand, the manipulation of transfer prices (applied by MNCs) results in important losses in a country’s tax revenue, and thus, create inequalities between nations. In another hand, transfer pricing tax adjustments (applied by tax authorities), result in significant costs for MNCs. Accordingly, these two parties are forced to work together in order to find a fair consensus. The OECD has introduced the Advance Price Agreement (APA), which can be concluded between a MNC and one or many tax administrations. It provides certainty to the MNC regarding the transfer pricing method selected. However, this process can be hard to achieve for MNCs, which need to openly collaborate with many tax authorities, and therefore, expose themselves to important risks. In this respect, this exploratory qualitative study mobilises both the Agency Theory and the Stewardship Theory when analysing this dichotomous relationship between tax administrations and MNCs in respect of transfer pricing strategies. Keywords: Transfer Pricing, Multinational Corporation, Tax Administration, Advance Price Agreement DOI: 10.7176/RJFA/11-24-11 Publication date: December 31 st 2020

The impact of countries' transfer pricing rules on profit shifting

PurposeThis study investigates the impact of different transfer pricing rules on tax-induced profit shifting. Existing studies create different enforcement rankings of countries based on specific transfer pricing provisions on the assumption that larger penalties and more extensive information requirements imply higher tax enforcement. This assumption carries limitations related to the impact of transfer pricing rules in different countries and to the interaction of different tax rules. Instead, the authors propose a nonordered segregation of groups of countries with different transfer pricing rules, and they empirically investigate the impact of these transfer pricing rules on the profit-shifting behavior of firms.Design/methodology/approachThe authors apply the hierarchical clustering method to analyze 57 observable quantitative and qualitative characteristics of transfer pricing rules of each country. This approach allows the creation of groups of countries based on a comprehensive set of regulatory characteristics, to investigate evidence of profit shifting for each of these separate groups. Profit-shifting behavior is measured by the variation in the volume of import and export transactions between local firms and related parties located in other countries.FindingsThe results indicate that firms have a higher volume of intrafirm transactions with related parties located in countries with a lower tax rate. This result is consistent with the profit-shifting hypothesis. Moreover, the results show that relevant differences in transfer pricing rules across countries produce different effects on the volume of intrafirm transactions. The authors observe that the existence of domestic transfer pricing rules that override the OECD Transfer Pricing Guidelines may inhibit profit shifting. In addition, the results suggest that the OECD guidelines may facilitate profit shifting. Overall, it is observed that some transfer pricing rules may be more effective than others in curbing profit shifting and that firms are still able to manipulate transfer prices under some tax rules.Research limitations/implications(1) The authors focus on the Brazilian context, which provides a suitable set of profit-shifting incentives for the analysis, since it combines an extreme corporate tax rate, a highly complex tax system, and a unique set of transfer pricing rules. (2) Profit-shifting behavior is captured by the volume of intrafirm transactions. The authors would prefer to observe the transfer price directly; however, this information is not disclosed by firms, for it may represent a limitation to the investigation. Nonetheless, theory shows that the profit-shifting behavior is reflected by the manipulation of both transfer prices and intra-firm outputs.Practical implicationsThe authors find that the volume of intrafirm transactions may decrease or increase, depending on the transfer pricing system of the foreign country (including the tax-differential effect). It suggests that some transfer pricing rules are more effective than others in curtailing the profit-shifting behavior and that firms are still able to find vulnerabilities in current rules and take advantage of them in deploying a profit-shifting strategy.Social implicationsResults provide knowledge about how key differences on transfer pricing rules across countries influence the profit-shifting behavior. The results of the study may have valuable application in solving regulatory mismatches, to eliminate blind spots in transfer pricing rules and thus to contribute to the current review of OECD guidelines and to the global tax reset movement.Originality/valueRecent studies suggest that if tax-avoidance incentives are somewhat weak, it becomes difficult to observe the shifting behavior of firms. The puzzle is to check whether profit shifting is nonexistent under weak incentives or whether this is a matter of methodological limitations. The authors’ analysis is applied to a complex tax background with strong profit-shifting incentives; thus, it allows the authors to obtain robust evidences of the shifting behavior and the effect of different transfer pricing rules.

Curbing Transfer Pricing in Tanzania: A Critical Evaluation of the Income Tax Act

Tax is an important tool for any country’s development. The collection of tax depends on the effectiveness of the tax legislation of a country, among other things. The taxation of domestic income poses fewer problems when it is dealt with through local legislation. The problems are likely to increase when dealing with tax with foreign elements. This is apparent in the taxation of associated multinational corporations operating across countries, where goods and services are transferred through transfer pricing. The intercompany transactions may offer transfer pricing manipulation with a view to maximizing profit. In response to this concern, the arm’s length principle is used to curb transfer pricing manipulation. This article examines transfer pricing provisions as provided for in the Tanzania Income Tax Act and identifies legal gaps that are likely to impede the application of the arm’s length principle. It calls for amendment of the act to address existing concerns.

INTERNATIONAL TAX PLANNING UNDER THE DESTINATION-BASED CASH FLOW TAX

This paper considers the implications of the destination-based cash flow tax (DBCFT) for three common ways of shifting taxable profits between countries: through manipulation of transfer prices, the use of debt, and locating intangible assets in low taxed jurisdictions. It shows that none of these planning devices would be available under a DBCFT, if adopted universally. This is because intra-group payments between two countries do not affect tax liabilities in either country. If adopted unilaterally, however, there would be an incentive to shift profit to the adopting country, at the expense of non-adopting countries.

Transfer Pricing in Argentina 1932-2015

This document provides a review of the Argentine tax authority’s structure for dealing with transfer pricing in Argentina; a chronological review of the legislative transfer pricing framework; and a very extensive listing of the transfer pricing cases that have reached different court levels. The document also summarises some of the difficulties encountered in relation to the application of the arm’s length principle in Argentina; coordination with foreign tax authorities; and the regulatory changes expected following the reports resulting from the G20/OECD BEPS Action Plan. Argentine transfer pricing legislation has taken several turns over time, moving from a more restrictive pricing of exports and imports for income tax purposes to what is today internationally known as the Sixth Method for commodity valuation; and from an application of what is locally known as the ‘economic reality’ principle, a principle attempting to consider the economic substance over the contractual forms, to a transplantation into local legislation of the Organisation for Economic Co-operation and Development’s Transfer Pricing Guidelines based on the arm’s length principle. The consequences of these regulatory changes have been that lately more and more cases are being disputed at different court levels, and tax authorities seem to find it increasingly difficult to challenge multinational entities’ transfer pricing manipulation schemes and support their arguments in courts of law.

Post Implementation of Goods and Services Tax (GST) in Malaysia: Tax Agents’ Perceptions on Clients’ Compliance Behaviour and Tax Agents’ Roles in Promoting Compliance

The Malaysian government introduced the Goods and Services Tax (GST) starting from 1 April 2015 to enhance the revenue collections and mitigate the transfer pricing manipulation. Tax agents play a significant role to help businesses to comply with GST law and regulations. After one year of GST implementation, it is vital to understand tax agents’ perceptions on clients’ compliance behaviour and tax agents’ roles in influencing compliance. A total of 30 registered tax agents completed a survey questionnaire. The analysis shows that tax agents devote their time to provide advice to their clients on meeting their GST requirements, and recording and reporting of GST transactions. Tax agents assert that clients pass on their GST responsibilities to tax agents to some extent. Tax agents also perceive that clients’ compliance level is low because clients occasionally submit GST03 after the deadline, compromise the accuracy of GST03 in order to get it done on time and intentionally make errors in their records. In terms of tax agents’ role in promoting compliance, the tax agents strongly agree that it is important for them to act as trusted advisors for their clients. After one year of GST implementation, this is the first study that explores tax agents’ perceptions on clients’ compliance and tax agents’ roles in promoting compliance. The findings benefit the Royal Malaysian Customs Department (RMCD) in assisting tax agents and the public for future compliance. Similar study should be adopted by countries that have recently implemented GST (for example, India) and it should be conducted to other GST players (i.e. taxpayers and RMCD officers) on annual basis to analyse the behavioural trends and identify weaknesses in GST administration.

TRANSFER PRICING: CHALLENGES AND SOLUTIONS WITHIN THE ASEAN REGIME

Transfer pricing has recently gained a prominent highlight in ASEAN countries. Eventhough transfer pricing policy has already been enacted by most of each ASEAN member states, there still exists loopholes – especially involving the transactions of cross border transfer prices. This research paper will discuss and further scrutinize the legal issues constituted by these loopholes, which affect both member states and Multi National Enterprises (“MNEs”) - particularly those associated with deficit tax revenue suffered by the member states, as a result of transfer pricing manipulations conducted by the MNEs. Transfer pricing concealed in the form of crossborder transactions; including but not limited to acquisitions, joint venture, and supply chains - impedes the movement of trade and capital, even catalyzes a tax distortion. Aside from ASEAN member states, MNEs are also being put at a disadvantage – to be subjected to a much greater burden on paying a higher cost of compliance, due to its responsibility to comply with more than one country’s jurisdiction and to have them imposed towards a susceptible double taxation.The result of this study encourages and essentially demonstrates the necessity of ASEAN to leverage a firm legal framework on transfer pricing that emphasizes on the manifestation of ‘arm’s length principle’ in all ASEAN countries’ jurisdictions.