International Transfer Pricing for Goods and Intangible Asset Licenses in a Decentralized Multinational Corporation: Review and Extensions

Abstract

We review and extend the core literature on international transfer price manipulation to avoid or evade taxes. Under negotiated transfer pricing with a viable bargaining structure, including performance evaluation disconnected from the transfer price, divisions voluntarily exchange accurate information to obtain firm-wide optimality, a result not dependent on restraint from exercising internal market power. For intangible licenses, a larger optimal profit shift for a given tax rate change strengthens incentives for transfer pricing abuse. In practice, an intangible's arm's length range is viewed as a guideline, a context where incentives for abuse materialize. Transfer pricing for intangibles obliges greater tax authority scrutiny.Journal of Economic Literature Classification: F23, H25, H26, L29, O34

On the Interdependency of Profit Shifting Channels and the Effectiveness of Anti-Avoidance Legislation

“…Therefore, it is relatively easy to justify high levels of profit shifting via this channel, even when the arm's length principle is applied. With respect to the transfer of common tangible goods and services, Dawson and Miller (2009) note that companies should find themselves more restricted in their profit shifting behaviour even in the absence of detailed transfer pricing regulations, since tax authorities may compare related-party transactions to the available third-party payments. As a result, for corporations that trade tangible assets or services that are easy to value, severe transfer pricing manipulation may result in double taxation even if no strict transfer pricing regulations exist.…”