International Transfer Pricing and Taxation: Evidence from Turkey

Abstract

Transfer pricing is a technique that is primarily used by multinational corporations while trading with their affiliated firms. Cross-country differences in both corporate tax rates and tariffs may create an incentive for multinationals to alter market prices of their products by using abusive transfer prices in order to shift their profits to relatively low-tax countries. This system offers opportunities to minimize multinationals’ global tax burden. Thus, this paper examines whether alterations in corporate tax rates across countries increase the use of manipulated transfer prices by multinationals. In order to determine the existence of such a relationship we construct an econometric model by using Turkey’s import product prices from Germany, France, England and Italy between 1995 and 2003.