Required Reading:
Sikka, P., & Willmott, H. (2010). The dark side of transfer pricing: Its role in tax avoidance and
wealth retentiveness. Critical perspectives on accounting, 21(4), 342-356.
Please read the article and answer the following questions.
1. On page 344 (and many other places in the article), the authors referred to what they term as the
“politics of transfer pricing”. What do you think the authors meant by such phrase?
The term "politics of transfer pricing" likely refers to the strategic and practical use of
transfer pricing mechanisms by corporations to shift profits between different tax
jurisdictions in order to optimize their tax burdens.
Interplay of Power and Interests: Different stakeholders like corporate and tax authorities,
attempt to protect their interests by implementing transfer pricing rules. tax authorities
strive to detect corporations that might adjust internal pricing to reduce tax liabilities in
certain countries.
Regulation and Compliance: Due to the complexity and regulatory difficulties of transfer
pricing, the rules are not easy to manipulation. Therefore, different countries and
institutions may have varied interpretations and enforcement standards.
Impact of Economic Globalization: Businesses can more easily adjust the distribution of
their capital and profits worldwide, making transfer pricing a crucial tool.
Social Justice and Tax Fairness: By avoiding tax, corporations reduce their financial
contributions to public, which could affect the government’s ability to provide public goods
and services, thereby impacting social stability and development.
2. On pages 344-346, the authors suggested that various attempts to regulate international transfer
pricing practices of multinational corporations had not been fully successful. Identify the major
challenges to successful implementation of international transfer pricing regulation (according to
the authors); in your view, which of these challenges is the greatest (or most difficult to solve)?
According to the article's authors, the major challenges to successful implementation of
international transfer pricing regulation include the complexity and manipulability of transfer
pricing calculations, the lack of effective enforcement tools, the global nature of business,
differing national tax laws, and resistance from powerful corporations. Among these, the
combined challenge of the global nature of business and the lack of effective enforcement
tools presents the greatest difficulty. The most difficult to overcome is likely the global nature
of business combined with the lack of effective enforcement tools. The reason is that while
legislative changes and international agreements can gradually harmonize differing national
tax laws and reduce corporate resistance through global consensus, the practical aspects of
monitoring and enforcing these regulations across global operations are facing challenges.
This issue is compounded by the rapid pace of globalization, where businesses continuously
evolve to find new loopholes and the tax authorities are always playing catch-up. This makes
comprehensive enforcement a continuously moving target, challenging to stabilize and
control effectively.
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3. On pages 346-352, the authors provided multiple examples of questionable transfer pricing
practices by multinational corporations. Perform a search on the internet and find at least one
recent (within the past 5 years) reported case of tax avoidance by multinational companies by way
of transfer pricing.
One recent case of tax avoidance through transfer pricing involves Google. In 2020, Google
agreed to pay €500 million in back taxes and fines to the French government. The settlement
was related to Google's use of transfer pricing to shift profits to low-tax jurisdictions, thereby
reducing its tax liability in France¹.
4. On p.354, the authors commented that professional accountants “…also have an interest in
offering novel interpretations of rules and marketing transfer pricing schemes to enable companies
to avoid taxes”. Reflect on this quote in the light of your future career in accounting and finance.
It highlights a critical ethical dilemma in the accounting and finance profession. As a future
professional in this field, you may face pressure to devise and implement tax strategies that
push the boundaries of legality to minimize tax liabilities for clients or employers. While
these strategies can be lucrative, they can also contribute to broader issues of tax fairness and
public trust in the financial system.
