Attracting Multinational Firms and Transfer Pricing

Hideki Sato

International Journal of Development and Conflict, 2018, vol. 8, issue 1, 27-30

Abstract: This paper demonstrates that by providing favourable corporate tax rates, developing countries create incentives for corporate tax evasion. We will demonstrate further that the subsequent tightening of penalties to prevent such evasions has no effect. When corporate tax rates are lower in the country of production than they are in the country of sale, multinational firms possess an incentive to conduct illegal transfer pricing. Furthermore, attempts to strengthen penalties imposed on illegal transfer pricing, within the country of either production or sale, proves counterproductive. As a result, we argue that the governments of developing countries should take into consideration the issue of tax evasion by means of transfer pricing and should provide in-kind services rather than favourable tax rates to attract multinational firms.

JEL-codes: F23 H26 O14 (search for similar items in EconPapers)
Date: 2018
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