Transfer Pricing and Global Poverty

Abstract

Transfer pricing will require the emergence of an international institution, a global agreement that guards against the race to the bottom by standardizing treatment of MNCs by developing countries. Without an international solution, developing countries will be forced to make up to the loss revenue elsewhere. Because most of these countries are characterized by weak tax capacity, making collection of income taxes difficult. Actually, transfer pricing is just the act of assigning internal prices for goods and services that are sold within a company and between subsidiaries of the same company. A transfer price should match either what the seller would charge an independent, external customer, or what the buyer would pay an independent, external supplier. Although it is hard to know for certain, there is strong reason to believe that transfer pricing activities may be reducing the developmental impact of FDI (foreign direct investment) flows.