Transfer Pricing: A Tool for Abusive Tax Avoidance?

Abstract

Multinational corporations and enterprises have started to increasingly operate as internationally integrated networks. They engage in aggressive global tax, planning to greatly reduce their total tax liabilities worldwide. They are able to transfer revenues to foreign affiliates with lower corporate tax rates. The most shocking tax avoidance has taken place in the transfer pricing manipulation of intellectual property and in relocation of intellectual property. Such abusive tax avoidance has unfairly drained significant tax revenue from many countries and has created an enormous challenge for the global economy.

This paper discusses the complexity of transfer pricing issues in relation to intellectual property issues, such as, the registration of intellectual property, their commercial realities, the challenges in their valuation and the accounting tax concerns that arise with it. It also addresses the abusive tax avoidance problem that is seen at the present time and the consequential growth of transfer pricing regulations worldwide and the prescribed valuation approach for transfer pricing of intellectual property.

It concludes by proposing legal reforms to reduce abusive tax avoidance and that Multinational corporations support the international legal reforms, because the Multinational corporations have severely undermined their credibility of being good corporate citizens who pay their fair share of taxes, with the host countries. If the Multinational corporations start to fully comply with the reforms that are proposed and utilize appropriate transfer prices to reflect the economic realities of their related-party transactions, they could restore their credibility with both the public as well as the government regulators.

This would solve the enormous challenge faced by the global economies and favorably regulate the climate for international business transactions.

Keywords: Transfer Pricing, MNCs, Intellectual Property, Taxation, Tax Avoidance.