Transfer Pricing – Business Incentives, International Taxation and Corporate Law

Abstract

Transfer pricing is a concept applied for three different purposes. From the business perspective, transfer prices are employed to increase the efficiency of intra-firm supplies between separate business units, taking into account the asymmetry of information among different agents. From the corporate law perspective, pricing in related-party transactions has to be controlled in order to prevent “tunnelling” to the detriment of creditors or minority shareholders. In the area of international taxation, transfer pricing under the “arm’s length”-standard serves the role of allocating profits to the different units of a multinational enterprise and of allocating taxing rights to the involved jurisdictions. The main thrust of this article is to show that these heterogeneous purposes of transfer pricing plead for a realignment. Transfer prices should basically be employed as incentives to improve the efficiency of the firm. International taxation should accept the outcome of business transfer pricing; if the ensuing profit allocation to a group company resident in a state does not satisfy the tax claims of this state, there should be an extension of limited tax liability of the foreign group company. Corporate law should only intervene if this is necessary to protect creditors and shareholders; compensating benefits which arise from the group situation should be taken into account.