Transfer pricing involves establishing the prices at which companies charge each other, with these charges meant to reflect market value but manipulation by businesses could lead to tax evasion and minimize taxes through business inversion. Transfer pricing strategies have also been associated with other ways of minimizing taxes such as corporate inversion.
Tax sensitivity
Taxation’s effects on multinational corporation decisions must be understood to ensure effective transfer pricing laws are implemented. To achieve this goal, financial and real control variables should be linked together and assessed simultaneously in order to assess tax changes on both sets simultaneously, providing for more precise measurements of its effect on profit maximization decisions by multinationals. Intangible asset correlations also need to be explored so as to improve future policymaking on this matter.
Further, it is vital that research be undertaken into the impact of the OECD/G20 Base Erosion and Profit Shifting process on multinational corporations and their investment decisions. Studies should explore adherence to transfer pricing regulations as well as coordinated efforts between countries to prevent companies from shifting profits.
Profit manipulation
Profit manipulation is a serious threat for multinational corporations, when companies attempt to manipulate earnings to reduce tax payments. This can occur through incentives given to sales employees or overtime hours utilized; or by using accounting tricks like selling securities classified as held for sale and recording income instead of stockholder equity gains.
At the same time as undermining tax bases, this practice deprives nations of valuable tax revenue – especially developing countries which rely heavily on corporate taxes for economic development. Multiple studies have demonstrated how tighter transfer pricing regulations can limit profit manipulation – these studies’ research methods, conclusions, and gaps are summarized in Table 2. Furthermore, Table 2 also summarizes other studies addressing effects of transfer pricing policies on investments, profits, taxes, etc.
Leading nations
Transfer pricing is the process of setting prices between related entities to ensure transaction prices reflect fair market value, helping companies avoid unnecessary taxes and comply with international tax regulations. Unfortunately, its complexity makes transfer pricing an area of high risk for multinational corporations in terms of compliance as well as financial reporting requirements.
Studies on transfer pricing regulations and their effect on tax collections and earnings management have been undertaken extensively. De Mooij and Liu (2020) found that MNC affiliate investment fell 11% following adoption of transfer pricing restrictions; thus highlighting the need for further studies on their effectiveness as well as alternative policy approaches.
Transfer pricing manipulation has been linked with other tax evasion strategies such as business inversions and the use of offshore tax havens, making its examination and legal reform essential. These issues highlight the necessity of further study and legislative changes.
Maximizing earnings
Managers of multinational corporations must understand how transfer pricing impacts them and create strategies to manage its risks and impacts effectively across global operations. Companies face many obstacles in doing this such as data availability issues and intangible property valuation issues which make this task an ongoing endeavor.
Transfer pricing strategies can be an effective means of minimizing taxes and increasing profits, yet these tactics may damage tax collections by undermining their basis. Studies have also indicated that transfer pricing regulations cause MNC affiliates to spend less and shift profits toward lower tax-rate regions, thus necessitating further regulation and study on this topic (de Mooij and Liu 2020; Vicard 2015; Flanagan 2017).
Compliance
An effective Transfer Pricing strategy can increase a company’s profitability and help it meet its financial goals, as well as protect it from risks, comply with regulations, foster innovation and encourage collaboration across global operations.
Implementation and Maintenance of Transfer Pricing Strategies can be an arduous task for multinational companies, particularly when faced with changing transfer pricing regulations and rates, penalties, interest charges, documentation requirements from various governments as well as lengthy analyses requiring time and resources for implementation and ongoing management. Therefore it is crucial that businesses invest the time and resources required in meeting such demands.
