Transfer Pricing: Alibi for Cross-Border Tax Evasion

In order to maximise profit and to reduce the burden of tax in the jurisdictions with high tax, many of the multinational companies abuse transfer pricing by directing the profit towards subsidiaries which are localised in more favourable jurisdictions from this point of view. The cross-border transactions effectuated, more exactly the mechanisms used to establish the transfer pricing involved in them, vary from the perfectly legal to the illegal ones and very often it is almost impossible for the tax authorities to contest them. The purpose of this paper is to analyse the mechanisms and practices of determining transfer pricing and their effects on the financial flows at the international level. The conclusions emphasize both the role played by transfer pricing in tax optimization and in cross-border tax evasion.