draining development.pdf - Khazar University

7Transfer Price ManipulationLorraine EdenAbstractMultinational enterprises (MNEs) are powerful actors in the globaleconomy. Transfer price manipulation (TPM) is one of the benefits ofmultinationality. By over- and underinvoicing intrafirm transactions,multinationals can arbitrage and take advantage of differences in governmentregulations across countries. This chapter explains the motivationsof firms that engage in TPM, illustrates the ways in which MNEscan arbitrage government regulations, and reviews the empirical estimateson TPM for developed and developing countries. We concludethat the strongest and clearest evidence of TPM comes from transactionlevelstudies of U.S. intrafirm import and export prices and from firmlevelstudies using Chinese tax data. No data set is perfect; so, the variousestimates are flawed. Still, the balance of the evidence suggests thatincome shifting does occur through the manipulation of transfer prices.What is needed is greater accessibility to transaction-level data on crossborderexport and import transactions and on MNE income statementsand balance sheets. This would enable scholars to shine more light in thedark corners of TPM and provide more accurate assessments of TPMimpacts on developing countries.205