by John Ja Burke
Published in the Virginia Tax Review 2011.
This Article rejects the conventional wisdom that “transfer pricing rules” are designed either to level the playing... more
This Article rejects the conventional wisdom that “transfer pricing rules” are designed either to level the playing field between Multi-National Enterprises [MNEs] and medium sized enterprises or to prevent pre-meditated tax evasion by MNEs. Rather, this Article posits that “transfer pricing rules” [TPRs] are substitutes for diminished tariff revenue, or imposed artificial mark-ups, shifting costs to ultimate purchasers, and contradicting the fundamental rule of microeconomic theory of firm maximizing profits by equating marginal cost and marginal revenue. The debate about transfer pricing now centres on tweaking the “arm’s length principle”, safe harbour rules, and advance pricing agreements. Lost in this abyss of profound distraction is the question: why a vertically integrated company that need not obtain a profit at each stage of the production process be treated, counter-factually, like a non-vertically integrated company operating on the open market paying higher prices at each stage of the production process. Further support for the claim against transfer pricing rules is that counter-intuitively, transfer pricing inures to the benefit of the integrated producer by inflating accounting costs and permitting the producer to hide economic profit thereby achieving a result undermining transfer pricing theory and regulation. While this Article recognises that MNE’s may abuse transfer prices, Tax Authorities,in their zeal to augment revenue, fail to distinguish amongtax abuse,efficient production methods, and pro-growth tax policy.
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