draining development.pdf - Khazar University

Transfer Price Manipulation 219Figure 7.1. Estimating Trade Mispricing from International Trade DataOutliers (outside of interquartile range)Upper bound(75th percentile)transaction priceFitted regressionLower bound(25th percentile)X (product, firm, and country characteristics)Source: Author.arm’s-length result. In establishing the range, the bottom 25 percent andtop 25 percent of observations are normally discarded, leaving the interquartilerange (between 25 and 75 percent) as the acceptable arm’slengthrange. If the MNE’s transfer price falls within this range, no section6662 penalties apply. If it is outside the range, unless the firm hasdemonstrated a good faith effort to comply with the section 482 regulations(for example, by filing complete, contemporaneous documentationof its transfer pricing policies), penalties do apply (Eden 1998; Eden,Juárez, and Li 2005). We have therefore used the interquartile range tomark outliers in figure 7.1 because these outliers would not normally fallwithin the arm’s-length range.There are, of course, problems with the TPM trade mispricingapproach, not the least of which is, first, that it is critically important toidentify which transactions occur within the MNE and which are arm’slengthtransactions. Too often, the studies attribute all trade mispricing tothe MNE, without having the data to determine whether the trade movedwithin the MNE or not. Second, the key to TPM trade mispricing studiesis that the data set must include both arm’s-length and intrafirm internationaltransactions, with a clear marker that distinguishes transactions