Transfer Pricing and Profit shifting in Multi-National Companies

Abstract

A multi-national corporation often places its affiliates at different jurisdictions, which differ in
tax rates, so that it may easily shift its profit from a higher tax jurisdiction to a tax haven and,
consequently, pay its corporate tax at a lower rate. This shifting of profit calls for a number of
transactions among the transnational affiliates of the corporation, and the price agreed upon by
the affiliates for these transactions is known as transfer price.

Valuing the transactions at arm’s length has been the traditional international approach to deal
with this issue of mispricing. That is to say, had the affiliates been unrelated, the transactions
would have been modelled on the market price, therefore, the principle of arm’s length pricing
affirms that transfer price should be the same as if the affiliates involved were two unrelated
parties negotiating in an ordinary market and do not form a part of the same corporate group.
However, implementing the arm’s length price is a difficult task as they ordinarily take place
in discretion that it often becomes difficult to locate the actual income accrued to bring it within
the scope of the tax legislation of the jurisdiction.

This seminar paper traces the evils bred by transfer pricing and examines the viability of
various regulations and measures adopted by India and certain other jurisdictions to deal with
the same.

Key Words: Arm’s Length, Tax, Transfer Pricing.