xample, take a MNC where subsidiary A in one country supplies materials to subsidiary B in another country. The price at which the materials are transferred between the two subsidiaries will ultimately determine the costs and hence the level of profit made in each country. Assume that in the country where subsidiary A is located, the level of corporate tax is half of that of the country where subsidiary B is located. If materials are transferred from A to B at very high prices, the B s costs will rise and its profitability will fall. On the other hand, A s profitability will rise. The MNC clearly benefits as more profits is taxed at a lower rather than higher rate. Had it been the other way around, with subsidiary B facing the lower rate of tax, then the materials would be transferred at a low price. This would increase subsidiary B s profits and reduce A s.MNCs are accused of simply investing in countries to gain access to natural resources, which are subsequently extracted in a way that is not sensitive to the environment. We often put premium on the short run gains from the MNCs presence than on the long run depletion of precious natural resources or damage to the environment. Perhaps, we are a victim of this circumstance as a nation as far as the mining sector of the country is concerned. Governments in the developing world often have a very short run focus. They are concerned more with their political survival through the ballot box rather than the long term interest of their people. Many of the benefits and costs of MNC investment that we have considered so far are most acutely felt in developing countries. The poorest countries in the world are most in need of investment and yet are most vulnerable to exploitation by multinationals and have the least power to resist it. MNCs employ only a small proportion of the total labor force in the developing countries, they have a powerful effect on these countries economies. They also often exert considerable power and influence over political leaders and their policies and are frequently accused of meddling in politics in certain developing countries. It is easy to see the harmful social, environmental and economic effects of multinationals on developing countries and yet governments in these countries are so eager to attract overseas investment and to turn a blind eye on many of their excesses [1, 2].
.2 Transfer pricing backgrounds
pricing is the setting of prices among divisions within an enterprise. Transfer prices are charges for goods and services between controlled (or related) legal entities, ie, within an enterprise. Legal entities considered under the control of a single corporation include branches and companies that are wholly or majority owned ultimately by the parent corporation. Certain jurisdictions consider entities to be under common control if they share family members on their boards of directors.principle a transfer price should match what the seller would charge an independent, arms-length customer. While unrealistic transfer prices do not affect the overall enterprise directly, they become a concern when they are misused to lower profits in a division of an enterprise that is located in a country that levies high taxes, and raise profits in a country that levies no or low taxes, as a tax haven. [3] Transfer pricing is the major tool for corporate tax avoidance. [4] allocationterm «tr...
