Transfer Pricing, a Profit Shifting Tool

The globalization process has led to an increase in multinational companies (MNEs), both in number and revenue. For years, MNEs took advantage of the worldwide tax jurisdictions, seeking the most suitable ones, more specifically the low tax jurisdictions, to get tax and operational advantages. Hence, researchers have emphasized the topic of transfer pricing as a means of shifting profits, arguing that certain legislative loopholes are being exploited, among other things, to take advantage of lower tax rates in certain jurisdictions. That’s why this article aims to present an overview of transfer pricing manipulations applied by MNEs to avoid tax payments. The analysis performed consists, firstly, of a case study showing transfer pricing profit shifting manipulation. Then the research is followed by examination of the actions took and performances obtained by the Romanian Tax Authorities in matters of transfer pricing, in particular special attention was given to tax evasion through transfer pricing. Also, as a part of the research, this article presents a matrix of profit shifting methods used by the MNEs to avoid taxes. The matrix is based on worldwide law cases and focuses on tax avoidance schemes set by MNEs to shift profits. The reviewed literature, as well as the research carried out in the regard to this article, shows the significance of the issue for the tax environment, given that setting transfer prices that are not in line with the market can generate significant risks.