Tax Motivated Transfer Pricing

Abstract: Multinational Corporations (MNCs) or Multinational Enterprises (MNEs) are of great importance in the global economy. A great amount of international trade is either between multinational corporations or within a multinational corporation, which is called intra-firm trade. Therefore, intra-firm trade is also of importance in the global economy. The price used in intra-firm trade is called transfer price. The process of deciding the transfer price refers to transfer pricing, which is an important strategy for multinational corporations to shift their global pre-tax profit from high tax jurisdictions to low tax jurisdictions for the purpose of tax avoidance. As major participants of the global economy, multinational corporations and governments view transfer pricing differently. Corporations regard transfer pricing strategy as an important tool for tax planning, which is consistent with their professional ethics, because the ultimate goal of the corporation is profit maximization. Therefore, corporations have strong motivations to manipulate transfer pricing for the tax purpose. However, tax avoidance behavior is a conflictual behavior. From the government’s perspective, it is harmful because such a behavior causes loss of tax revenue, which could be used to fulfill public spending obligations such as financing public infrastructure, national defense, education, health care, social security and other public services. The purpose of this paper is to study tax motivated transfer pricing from the perspective of stake-holder theory and legitimacy theory in hope of finding out the motives for corporations to engage in transfer pricing manipulation, and whether tax avoidance behavior via manipulating transfer pricing will cause a legitimacy problem. In order to do so, we examined both cases related to tax avoidance via transfer pricing manipulation and regulations involving transfer pricing, OECD guidelines in particular. We also conducted a small survey and telephone interviews with seven Swedish media companies in order to find out the public attitude towards tax planning. We try to analyze corporations’ conflictual behavior from both a theoretical and practical perspective, and then compare them with each other. We also try to provide an explanation for the result of the comparison and extend our analysis to the question: Is legitimacy theory applicable to the issue of tax planning? Last but not least, some suggestions about reducing tax motivated transfer pricing manipulation are presented.