Transfer Pricing Schemes Research Articles

Leveraging AI for Transfer Pricing Strategy Development and Execution: A Practical Approach

Abstract—Integrating artificial intelligence (AI) into transfer pricing strategies offers excellent opportunities for global companies to optimize taxes, thereby optimizing business strategies across international borders. This paper proposes a practical approach to an AI-driven framework for the development and execution of transfer pricing strategies. This paper also focuses on compliance, risk management, global profit optimization, and organizational value creation, which are considered to face increased scrutiny from tax authorities worldwide. The paper proposes a step-by-step approach that integrates AI technology into various stages of transfer pricing, from data analysis to documentation. With AI's data analytics, predictive modeling, and decision-making, companies can enhance accuracy and efficiency to meet compliance while enhancing business decisions. The framework discussed provides a practical guide for global organizations to navigate global taxation complexities. Keywords—Transfer pricing, Artificial Intelligence, Machine Learning, Data Analysis, OECD, Pillar 1, Pillar 2, BEPS, NLP, Automation.

Global tax avoidance and evasion: A landscape through insights from a systematic literature review and bibliometric analysis

This research aims to comprehensively investigate contemporary practices and factors influencing global tax avoidance and evasion through a systematic literature review (SLR) and bibliometric analysis. This study methodology uses SLR with bibliometric analysis to map this research trend. Relevant literature was collected and systematically analyzed to identify key themes, methodologies, and findings regarding tax avoidance and evasion. The study’s findings identify various tax avoidance practices, including profit shifting, transfer pricing strategies, and the use of tax havens by multinational corporations. The report also highlights various forms of tax evasion, such as money laundering and illicit financial flows. Key factors influencing tax behavior are ethical considerations, government policies, economic factors, and corporate governance practices. This analysis highlights the complex interactions between these factors in shaping tax practices globally. The study’s conclusions show that effective tax governance requires a multifaceted approach integrating ethical standards, a strong regulatory framework, and international cooperation. Ethical corporate behavior and transparent reporting are essential in promoting tax compliance and fairness. This study emphasizes the critical role of policymakers in designing and enforcing tax policies that discourage aggressive tax planning while encouraging economic growth and equality. Recommendations from these findings are to increase transparency in multinational operations, strengthen international tax cooperation, and improve global tax administration capabilities. In addition, increasing taxpayer education and awareness can foster a culture of compliance and ethical tax practices. Future research should prioritize longitudinal studies and case-specific analyses to deepen understanding and develop targeted interventions to address tax avoidance and evasion challenges.

A Risk Management Strategy under Transfer Pricing for Multi-National Supply Chain along the Belt and Road Initiative

The “Belt and Road Initiative” (BRI) drives international trade more and more frequently, making exchange rates and taxes unavoidable issues for multi-national companies. Thus, exchange risk uncertainty and tax saving planning should be considered in the operational decisions of a multi-national supply chain. This paper constructs a Stackelberg game model with four composite modes to explore the risk-taking and hedging strategy of retailers with reference-dependent psychology. The results show that: (1) exchange rate risk is transmitted through all subjects under the cost-plus transfer pricing strategy, while it is transmitted only between headquarters and retailers under the resale-price transfer pricing strategy. (2) No matter which subject bears the exchange rate risk, the motivation is stronger under the resale-price transfer pricing strategy. (3) The effect of futures hedging exchange rate risk is influenced by retailer reference-dependent psychology. When the reference dependence coefficient is low, and the risk of positive exchange rate fluctuations is too high, the retailer chooses to hedge its exchange rate risk. At this time, the transfer pricing strategy should shift to cost-plus, and the exchange rate fluctuation range that each entity can afford is larger than before hedging.

THE INFLUENCE OF DEBT COVENANT, PROFITABILITY, BONUS PLAN, AND EXCHANGE RATE ON TAX AVOIDANCE WITH TRANSFER PRICING AS AN INTERVENING VARIABLE IN RAW GOODS SECTOR COMPANIES ON THE INDONESIAN STOCK EXCHANGE

In companies operating in the Raw Goods Sector that are publicly traded on the Indonesian Stock Exchange, the objective of this research is to determine how debt covenants, profitability, bonus plans, and exchange rates influence transfer pricing. Furthermore, the study seeks to ascertain the impact of transfer pricing, equity markets, debt covenants, profitability, and compensation schemes on tax evasion within the Raw Materials Sector of Indonesian Stock Exchange-listed companies. The research methodology employed in this study is associative research. The subject of investigation is the raw materials industry on the Indonesia Stock Exchange throughout the period from 2018 to 2022. The population for this study consists of 96 companies registered on the Indonesia Stock Exchange in the primary consumer products industry, spanning from 2018 to 2022. The research employed a purposive sampling strategy. This research consisted of a sample size of 23 firms. The data analysis technique is facilitated by the utilization of a specific tool, namely Statistical Product and Service Solution (SPSS) version 26. The research findings indicate that the variables of debt covenant, bonus plan, exchange rate, and transfer pricing do not have any impact on tax avoidance. However, profitability is found to have a negative influence on tax avoidance. Debt covenant, profitability, bonus plan, and exchange rate do not impact transfer price. In addition, transfer pricing is unable to reconcile debt covenants, profitability, compensation schemes, and the impact of exchange rates on tax evasion.. Indonesia as a country that has many companies that have been successful at the national and international levels can increase sources of state revenue. As the company's profit rises, the corresponding tax payment also grows. This forms the basis for companies to employ tax evasion tactics in order to reduce their tax obligations. This study investigates the factors that influence tax evasion

The Effect of Transfer Pricing and Profitability on Tax Avoidance Empirical Study in Industrial Sector Companies

This study aims to evaluate the influence of transfer pricing and profitability on tax avoidance in industrial sector companies listed on the Indonesia Stock Exchange (IDX) during the period 2019-2023. The analytical methods employed include descriptive statistical analysis, classical assumption tests, multiple linear regression analysis, t-tests, and the determination coefficient test using SPSS software with a 5% significance level. The sample used in this study consists of 139 observations. The results indicate that transfer pricing has a significant effect on tax avoidance, while profitability does not have a significant impact on tax avoidance. These findings suggest that companies tend to use transfer pricing strategies to minimize tax burdens and increase after-tax profits. Conversely, changes in profitability levels cannot be considered a reliable indicator to predict changes in corporate tax avoidance behavior. Thus, this study highlights the importance of transfer pricing as a key factor in corporate tax avoidance strategies, while profitability does not show a significant relationship with tax avoidance. These findings contribute to the literature on tax avoidance and can serve as a reference for policymakers in understanding the dynamics of tax avoidance in the industrial sector.

Transfer Pricing Implications for the Cannabis Industry

The US cannabis industry encounters substantial tax challenges stemming from the classification of cannabis as a Schedule I controlled substance and the implications of section 280E of the Internal Revenue Code. To mitigate the adverse tax treatment imposed by this section, cannabis companies can employ various transfer pricing strategies. Vertical integration strategies, which allow companies to segregate activities across distinct business units within different industry verticals, serve to maximize the cost of goods sold calculation while minimizing the impact of section 280E. However, it is essential to recognize that such strategies also subject cannabis companies to transfer pricing regulations under section 482 of the Internal Revenue Code. Adequate transfer pricing documentation plays a crucial role in supporting pricing structures and minimizing tax exposure.

Tax havens and transfer pricing strategies: Insights from emerging economies

AbstractThis study examines multinational companies in emerging markets, exploring their transfer pricing strategies for establishing tax havens. These companies employ various mechanisms (e.g., transfer pricing, profit transfers, and the reallocation of intangible assets) to minimize their tax liabilities. Today an increasing level of intangible assets facilitates smoother profit transfers to jurisdictions with lower tax burdens. Furthermore, these companies relocate their productive activities to tax havens, creating opportunities for corporate tax evasion and avoidance. Despite the efforts of governments and international organizations to propose the adoption of a minimum tax rate for different countries, these companies have been able to reduce or completely avoid paying taxes. Our study sample includes companies headquartered in emerging countries between 2010 and 2020. The study introduces some innovative elements, such as the variable “transfer pricing intensity,” which is derived from manual data collection. This variable enables analysis of the transfer pricing levels employed by multinational companies. In addition, a noteworthy contribution of this research is the use of an unconventional tax proxy known as AREA, which monitors the tax benefits associated with short‐ and long‐term debts. The results demonstrate that these companies employ a diverse range of instruments, often in combination, to reduce taxes in their conglomerates. These findings contribute significantly to a deeper understanding of the intricacies surrounding corporate tax optimization practices and provide valuable insights for governments in formulating robust policies that promote transparency and accountability in the international tax landscape.

Impact of Round-tripping FDI on Tax Avoidance of Enterprises

As a part of enterprise strategy, round-tripping FDI has a far-reaching impact on tax avoidance. Enterprises aim to minimize the tax burden by redistributing capital, optimizing the global business structure and adjusting the location of economic activities. This strategic choice has spawned a variety of complex mechanisms in the international tax environment, and its influence involves tax competition, tax evasion theory, transfer pricing and intellectual property rights on a global scale. These incentives can attract enterprises to bring their overseas profits back to their home countries by reducing their operating costs and improving their competitiveness, thus achieving economic growth and increasing employment opportunities. Generally speaking, the impact of round-tripping FDI on corporate tax avoidance is reflected in many levels. By optimizing the global business structure, flexibly using intellectual property rights and adjusting the transfer pricing strategy, enterprises skillfully use the international tax environment to maximize economic benefits. At the same time, the state provides positive support for enterprises through economic incentives, which reduces the tax burden of enterprises in the domestic economy and promotes the development and innovation of domestic industries.

Arm's Length Principle Analysis on Tax Avoidance through Transfer Pricing Post- Pandemic (Covid-19): A Proposed Study

The Covid-19 pandemic has forced society to adapt to technological advancement and decision-making behavior in corporate management. In response, companies implemented transfer pricing strategy to ease the tax burden in order to optimize expenditure efficiency and maximize profitability. Besides its commonality among multinational companies, researchers observed that transfer pricing had been utilized significantly between related domestic companies, which may bring potential loss of state tax revenue. On the other hand, in principle, transfer pricing is legal and tax-wise permitable as long as it applies the arm’s length principle. This research was conducted in the form of case study with the objective to analyze the application of arm’s length principle on tax avoidance activity through transfer pricing between domestic companies by exploring its theoretical model. The analysis comprises five methods, namely the price comparison method between independent parties, the resale price method, the cost-plus method, the profit-sharing method, and the transactional net profit method. The evaluation of a company’s arm’s length principle can be utilized as a basis for recommendation, both for related companies to optimize tax planning and for policymakers to mitigate the risk of losing state revenue. This study is imperative in understanding post-Covid-19 impact on corporations as a mean of adaptation and going concern– specifically on how transfer pricing among specially-related domestic companies have become a cost-cutting effort. This study is expected to bring guidance for the following researches and contribution for government in overcoming the potential rise of domestic transfer pricing postpandemic.
 Keywords: arm’s length principle, domestic company, transfer pricing, tax avoidance

The Effect of Profitability, Tunneling Incentive, Debt Covenant, and Intangible Assets on Transfer Pricing Decisions with Tax Minimization as Moderating Variables: A Case Study of Manufacturing Companies Listed on the Indonesia Stock Exchange in (2019 – 2

The increase of foreign investment in Indonesia in 2020 and 2021 will cause increased reception from side taxation, but the tax justice network reports that Indonesia is still experiencing loss from side tax revenue, a loss caused by corporate tax avoidance by the company multinational through transfer pricing schemes. This research aims to investigate the influence of profitability, tunneling incentives, debt covenants, and intangible assets as indicated factor influence transfer pricing decisions with tax minimization as variable moderation. The research method used is quantitative with the technique of taking samples using purposive sampling; the number of samples was 27 companies out of the 195 population. Research results revealed that profitability, tunneling incentives, and debt covenants positively affect transfer pricing decisions; meanwhile, tax minimization moderates the effect of profitability, tunneling incentives, debt covenants, and intangible assets on transfer pricing decisions.

Taxation, Bonuses, and Tunneling Incentives: Impact on Transfer Pricing Decisions in Manufacturing Companies

This study examines the empirical relationships between taxation, bonus mechanisms, tunneling incentives, and transfer pricing decisions in manufacturing companies listed on the Indonesia Stock Exchange (IDX) during the period of 2017-2019. Using purposive sampling, data from eleven companies were collected and analyzed through descriptive statistics, normality tests, classical assumption tests, and linear regression. The results reveal that taxes, bonus mechanisms, and tunneling incentives significantly influence transfer pricing decisions in the selected manufacturing companies. This research provides valuable insights for policymakers, regulators, and practitioners in understanding the dynamics of transfer pricing decisions and their implications for manufacturing firms.
 Highlights:
 
 The impact of taxation on transfer pricing decisions: This study investigates the influence of taxes on transfer pricing decisions in manufacturing companies listed on the IDX, providing insights into the relationship between tax policies and transfer pricing strategies.
 Bonus mechanisms as determinants of transfer pricing decisions: By analyzing the effect of bonus mechanisms on transfer pricing decisions, this research sheds light on the role of incentive structures in shaping the pricing practices of manufacturing companies.
 Tunneling incentives and transfer pricing decisions: This study explores how tunneling incentives affect transfer pricing decisions, offering valuable insights into the potential risks of opportunistic behavior and their implications for corporate governance and control mechanisms.
 
 Keywords: Transfer pricing, taxation, bonus mechanisms, tunneling incentives, manufacturing companies.

Corporate social responsibility in transfer pricing strategies

Introduction. International groups of com­panies (IGCs) have significant economic, environ­men­tal, and social impacts on the region of presence. The most powerful mechanism for influencing regional development is IGC payments to the state. Problem. The object of the study was selected by IGC, which did business in Russia in early 2022. The aim of the article is to analyze the transfer pricing strategy of the IGCs in the context of their implementation of the principles of cor­porate social responsibility, achieving the Sustainable Development Goals (SDGs) and, in particular, promo­ting peace and preventing military aggression. Methods. The chosen research methodology involves the analysis of data on the activities of the IGC in terms of the strategy of the transfer pricing, promoting the implementation of the SDGs, and corporate social responsibility. Results. The connection between the transfer pricing strategy and the level of achievement of the SDGs and, first of all, peace in the region of the IGC presence is analyzed. An analysis of OECD and UN statistics on the presence of IGC subsidiaries in Russia and its sustainable development was conducted. The discrepancy between the assessments of the achievement of the SDG 16 «Peace, Justice and Strong Institutions» in Russia’s foreign economic policy is shown. A dissonance between the statements of social responsibility of some IGCs and their reaction to Russia’s military aggression is identified. The necessity of adjusting the approaches to deter­mi­ning the transfer pricing strategy and assessing the level of achievement of the SDGs is proved. Conclusions. The global system of business taxation and transfer pricing policy is able to solve not only purely economic problems, but also counteract any threats to the future of mankind and promote its sustainable development. Improving the methodology for determining progress toward the SDGs requires an adequate assessment of the comp­liance of the SDG 16 «Peace, Justice and Strong Institutions». In expanding the geography of its economic interests in the future, the IGC should use new appro­aches to assessing the business climate in the region, taking into account the factor of war and peace.

SKEMA TRANSFER PRICING UNTUK PENGALIHAN LABA

More than 60% of world transactions used a transfer pricing scheme. Transfer pricing for tax avoidance is not in accordance with domestic Indonesian tax rules. This study aim to generate understanding about transfer pricing concept, determine transfer pricing risk factors, identify transfer pricing schemes, and explain transfer pricing risk management. Descriptive analysis method based on secondary data and literature studies applied in this research. This research shows that transfer pricing should be based on the arm’s length principle. Factors that determine transfer pricing risks are inter-company transactions, tax rates, and foreign ownership. Transfer pricing can be implemented in inter-company transactions schemes related to sales, intangible asset, loan and services through one or a combination of several types of inter-company transactions. Transfer pricing risk management can be carried out through law enforcement, access of information agreement, and development of a transfer pricing risk-based monitoring system. The Directorate General of Taxes needs to pay attention to taxpayers who have affiliated transactions, lower tax rates, and foreign ownership in monitoring the risk of transfer pricing. Business groups also need to to fulfill the arm's length principle in the transfer pricing scheme in order to comply with the regulation. Keywords: business groups, inter-company transactions, profit shifting, tax avoidance, transfer pricing

РОЗВИТОК ТРАНСФЕРТНОГО ЦІНОУТВОРЕННЯ В УМОВАХ ГЛОБАЛІЗАЦІЇ ТА ШЛЯХИ ПІДВИЩЕННЯ ЕФЕКТИВНОСТІ РЕЖИМУ ТРАНСФЕРТНИХ ЦІН

The mechanism of enterprises pricing for moving the main share of profits abroad to low-tax havens has been investigated. The analysis of the existing conflict of interest between MNEs is carried out, they seek to obtain super-profits and the fiscal authorities, must ensure proper control over taxation by introducing the arm's length principle. The article shows the complexity and versatility of the rules of tax control over transfer pricing. The influence of the main factors on the current methods of taxation of enterprises is determined. The nature of transfer pricing risks is characterized and the main tasks of the tax authorities are identified, which is to maximize results, while ensuring business confidence in the tax system. It is shown that transfer pricing schemes are carried out using various techniques of aggressive tax planning, requiring the introduction of additional countermeasures. In the study of transfer pricing in the context of globalization and transnationalization of international relations, it was found that due to the processes of globalization, intersectoral pricing has become a daily necessity for the vast majority of enterprises. The transfer pricing mechanism is the basis of the latest approaches to pricing in the global economy, thereby distorting the level of world fair prices. In modern conditions of development and complication of market relations, there are rapid processes of strengthening foreign economic relations of domestic economic entities and the total manifestation of globalization processes. Due to the fact that globalization is gaining momentum, it is becoming increasingly difficult to maintain the current methods of taxation of TNCs operating in different tax jurisdictions. Transfer pricing is one of the most important aspects of tax minimization in multinational companies. At the same time, the financial interests of the state are expressed in the amount of tax revenues, the solution of this contradiction makes it necessary to improve the tax regulation of transfer pricing between interdependent persons. The practical significance of the research results obtained lies in the possibility of their use in the formation of an appropriate legislative and regulatory framework.

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

Cost-benefit analysis of investment projects

The paper contents included considerations of the relationships existing between business units of Multinational Organizations (MNOs). Relevant economic theory provided a framework for the review of accounting practices. An example of consequences derived as the result of transfer pricing strategies compared with the transaction costs of pharmaceutical MNO GlaxoSmithKline (GSK) was provided.

Skema Transfer Pricing Pada Perusahaan Pertambangan dan Faktor-Faktor yang Terlibat

The purposes of this study are to analyze and describe the tax avoidance schemes through transfer pricing and the factors that influence the decision on transfer pricing by mining companies. Data analysis uses qualitative techniques with qualitative data obtained from literature studies from internet sources. The results of the study shows that the transfer pricing schemes carried out by mining companies in general can be divided into two, namely by transferring mining rights to other companies that have special relationships and conducting transactions with companies that have special relationships, with prices agreed to be below the average market price. The results of the study also indicate that the mining company's decision to transfer pricing is influenced by nine factors, namely executive characteristics, leverage, scale of the company as a multinational company, disclosure of social responsibility, capital intensity, institutional ownership, audit committee, audit quality, and information transparency.
 Keywords : Transfer Pricing, Tax Avoidance, Mining Companies.

Heads I win, tails you lose: Asymmetric taxes, risk taking, and innovation

When multinationals face lower tax rates abroad than in the US, transfer pricing strategies generate an asymmetry in the tax rates on a project’s profits and losses. We show that the tax savings from transfer pricing can be expressed as a long position in a call option. We use a model to show that this transfer pricing call option leads a firm to choose riskier and larger projects than it would otherwise. Thus, transfer pricing strategies do not simply reduce a firm’s taxes, they can influence the scale and types of projects undertaken.

Heads I Win, Tails You Lose: Asymmetric Taxes, Risk Taking, and Innovation

When multinationals face lower tax rates abroad than in the US, transfer pricing strategies generate an asymmetry in the tax rates on a project's profits and losses. We show that the tax savings from transfer pricing can be expressed as a long position in a call option. We use a model to show that this transfer pricing call option leads a firm to choose riskier and larger projects than it would otherwise. Thus, transfer pricing strategies do not simply reduce a firm's taxes, they can influence the scale and types of projects undertaken.