On the Properties of Transfer Pricing Rules

We review some relevant literature in the field of tax evasion avoidance proposals. Unfortunately legislative a political conditions (double taxation treaties, tax competition) prevent some of the most useful designs proposed in the scholar literature, to be widely used in Europe. Then we concentrated on properties of transfer pricing rules proposed by OECD guidelines – Cost+ method, comparable resale price method (CRP), profit split method (PSM), comparable uncontrolled price method. We used neoclassical microeconomic model of firm a simulation tools (random cost a income functions). We found that some of these methods (PSM, CRP with fixed discount) cause quite large distortions in the optimal quantity of final good (a therefore also intermediate product) produced. PSM also falls short on the instability of profitability between related industries in time. The most inconvenient property of Cost+ a CRP, which do not distort quantity produced by MNE if percentage markup (discount) is used, is that they are very sensitive to quality of database revenue authority uses, to stability of prices within industry a to profit margin. VAT or turnover taxes are naturally less sensitive, so emphasis on VAT might be a partial solution of multinationals’ pricing problem.