External Variables Affecting the Transfer Pricing Decisions: Arm’s Length Basis and Transfer Pricing

Abstract

Transfer pricing estimations play a crucial role in transactions involving multinational enterprises, and the decisions regarding transfer pricing may be affected by a range of influential factors. This research investigates selected external determinants that impact transfer pricing choices made by multinational enterprises across a sample comprising 95 countries. Panel data covering the years from 2014 to 2023 has been employed for empirical analysis, and using panel data regression techniques, the study assesses the influence of several variables, including effective tax rates, the level of economic development, the extent of trade openness, and the quality of regulatory institutions, which shape the strategies of multinational enterprises concerning profit shifting. The findings indicate that lower levels of taxation, weaker enforcement of legal standards, and greater trade openness contribute to a higher probability of manipulative transfer pricing behavior. The research concludes that practices related to base erosion and profit shifting can be curtailed by improving the strength of legal enforcement mechanisms.