Transfer Pricing of Intrafirm Sales as a Profit Shifting Channel – Evidence from Taiwan
Date Issued
2008
Date
2008
Author(s)
Chang, Shu-Min
Abstract
Multinational companies have enhanced tax planning opportunities by means of crossborder profit shifting. In particular, it is supposed that transfer pricing of intrafirm trade constitutes an important channel for companies to shift profits between countries. Consequently, a number of countries have recently tightened transfer pricing legislation and have been increasingly engaging in transfer pricing audit and investigation. In order to follow the international trend and reduce conflict between tax administration and multinational corporations, Taiwan has established the regulation, Regulations Governing of Assessment of Profit-Seeking Enterprise Income Tax on Non-Arm’s-Length Transfer Pricing, on December 28, 2004. This regulation was established in accordance with the OECD guidelines on transfer pricing and the regulation of every country. This paper investigates whether transfer pricing of intrafirm sales within multinational companies represents an important channel of company tax planning in Taiwan. A simple theoretical model, considering transfer pricing of intrafirm sales of a multinational company, is set up to obtain empirical implications. The theoretical analysis suggests that if transfer prices are tax driven, intrafirm sales will decrease with an increasing statutory tax rate at the supplying affiliate’s location and increase with an increasing statutory tax rate at the receiving affiliate’s location. The empirical analysis uses data of the listed companies of Taiwan Stock Exchange and Gre Tai Securities Market from 2004 to 2006. Firm-level data are taken from the Taiwan Economic Journal (TEJ) database. The empirical results show that the size of intrafirm sales from the controlled affiliate will decrease with an increasing tax rate of the affiliate’s location. The empirical results also show that the size of intrafirm sales from the parent company will increase with an increasing tax rate of the affiliate’s location. Thus, it can be confirmed that profit shifting by means of transfer pricing of intrafirm sales works effectively.
Subjects
Intrafirm Sales
Multinational Companies
Profit Shifting
Transfer Pricing
Corporate Income Tax
Type
thesis
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