Transfer pricing as a vehicle in corporate tax avoidance

Abstract

Using transfer pricing, U.S. Corporations are able to transfer revenues to foreign affiliates with lower corporate tax rates. The Internal Revenue Code requires intercompany transactions to comply with the “Arm’s Length Principle” in order to prevent tax avoidance. We describe and use elaborate examples to explain how U.S. companies exploit flexibility in the tax code to employ transfer pricing and related tax reduction and avoidance methods. We discuss recent responses by regulatory bodies.