Is transfer pricing strictness deterring profit shifting within multinationals? Empirical evidence from Europe

Improving the SNA Treatment of Multinational Enterprises

“…First, transactions within MNEs are valued using transfer pricing methods that may fail to reflect market outcomes, which is the preferred basis for all transactions recognized in the SNA . While such failure inevitably affects economic accounting statistics, any distortions that result from mispriced transactions are presumably limited because transfer prices are subject to strict regulatory scrutiny and enforcement by national tax authorities (Marques and Pinho, ). A second challenge for economic accountants is the appearance of transactions when MNEs are structured with special purpose entities that lack production because such structuring simply facilitates the artificial location of production and related income as well as the strategic location of financial assets and liabilities.…”

A European map regarding the strictness

“…Moreover, in this study the authors examined the transfer pricing regulations from 44 countries over a time period of nine years (2001)(2002)(2003)(2004)(2005)(2006)(2007)(2008)(2009) and noted that the transfer pricing regulations are less strict in European countries than in countries outside the Europe. Marques and Pinho (2016) built an index in order to measure the strictness of the transfer pricing framework. The index was built on two fundamental pillars: transfer pricing regulations (statutory rules and documentation requirements) and law enforcement mechanisms (penalty aspects; mechanisms to assist enforcement -e.g.…”

Studies on transfer pricing systems and profit shifting: impact of the international regulation on the shifting behaviour of Brazilian firms

“…Results indicate that the implementation of TP rules and the increase in TP strictness is associated with a general reduction in profit shifting. Marques and Pinho (2016) investigate the extent to which the implementation and tightening of TP regulation deter profit shifting in European countries. Analysis is applied to a sample of 33 countries for the period of 2001-2009.…”

“…Furthermore, studies also investigate the impact of TP rules and tax enforcement on the profit shifting. While some studies find that specific anti-shifting measures are effective in preventing the shifting behaviour of firms (Marques & Pinho, 2016;Beuselinck, Deloof & Vanstraelen, 2015;Lohse & Riedel, 2013), others show that MNE are able to exploit weaknesses and blind-spots in tax rules, thus to distort the TP (Davies, Martin, Parenti & Toubal, 2018;Beer & Loeprick, 2015). The predominant approach in current literature to propose some type of enforcement ranking of countries, based on the assumption that the existence of specific TP rules or that larger penalties for non-compliance implies higher tax enforcement.…”

“…Current researches aim to analyse the profit shifting behaviour as a function of the cross-country tax differentials and the impact of countries' enforcement levels (Beer, De Mooji & Liu, 2018;Nicolay, Nusser & Pfeiffer, 2017;Marques & Pinho, 2016;Beuselink, Deloof & Vanstraelen, 2015;Lohse & Riedel, 2013). Relevant information about intra-firm transactions and tax rates are overall observable from public reports and from firms' financial statements, thus it is possible to obtain consistent measures for these factors.…”