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Tax Αvoidance and Transfer Pricing: A VECM Regression Model

Author

Listed:
  • N. Eriotis
  • S. Missiakoulis
  • I. Ntokas
  • M. Tzavaras
  • D. Vasiliou
  • E. Thalassinos

Abstract

Purpose: The study examines the tax incentives related to pricing decisions between affiliated companies which are tax residents of Greece and focuses on the pricing behavior of intra-group transactions among related parties. Design/methodology/approach: In the context of the empirical analysis, a panel data regression analysis was performed, using a vector error correction model (VECM) with two lags. The data used in the analysis were retrieved from the AMADEUS (Analyze MAjor Databases from EUropean Sources) Tp-Catalyst (TP 96, March 2018 edition) database and consists of 2,131 companies from most Greek economy sectors, of which 971 are independent and 1,160 are affiliated with other companies. The total sample consists of 17,048 observations, of which 7,768 refer to independent companies and 9,280 to affiliated companies. The research span is from 2010 to 2017 and a two-lag VECM regression model was implemented. Findings: The results of the study are generally in compliance with the international literature. According to the study, affiliated companies appear to have lower profit margins, lower tax burden and a lower Berry ratio than independent companies. Practical implications: The study elaborates on the positive effects of the new Income Tax Code and the new Tax Procedure Code, according to which companies operating in Greece and conducting intra-group transactions, are obliged to document such transactions in the context of a price documentation file. Originality value: The empirical research of the present paper is unprecedented in Greece. The size of the sample in terms of number of companies, number of available ratios and time depth, allowed the analysis through a VECM model to examine the possible use of transfer pricing by affiliated companies to decrease their tax burden. A similar lagged model of autoregressive vectors has not been identified in the relevant literature. The results provide the authorities a benchmark for future audits, since indicate that the manipulation is significant both in short, as well as in a long-term time frame. The use of a VECM model with two lags revealed that the manipulation is not limited within one financial year and the authorities should inspect data from a wider time range when conducting their audits.

Suggested Citation

  • N. Eriotis & S. Missiakoulis & I. Ntokas & M. Tzavaras & D. Vasiliou & E. Thalassinos, 2021. "Tax Αvoidance and Transfer Pricing: A VECM Regression Model," International Journal of Finance, Insurance and Risk Management, International Journal of Finance, Insurance and Risk Management, vol. 11(1), pages 50-67.
    • Handle: RePEc:ers:ijfirm:v:11:y:2021:i:1:p:50-67
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    References listed on IDEAS

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    1. Conover, Teresa L. & Nichols, Nancy B., 2000. "A Further Examination of Income Shifting Through Transfer Pricing Considering Firm Size and/or Distress," The International Journal of Accounting, Elsevier, vol. 35(2), pages 189-211, July.
    2. John Mutti & Harry Grubert, 2009. "The Effect of Taxes on Royalties and the Migration of Intangible Assets Abroad," NBER Chapters, in: International Trade in Services and Intangibles in the Era of Globalization, pages 111-137, National Bureau of Economic Research, Inc.
    3. Gramlich, J.D.Jeffrey D. & Limpaphayom, Piman & Ghon Rhee, S., 2004. "Taxes, keiretsu affiliation, and income shifting," Journal of Accounting and Economics, Elsevier, vol. 37(2), pages 203-228, June.
    4. Ronan Merle & Bakr Al-Gamrh & Tanveer Ahsan, 2019. "Tax havens and transfer pricing intensity: Evidence from the French CAC-40 listed firms," Post-Print hal-02332055, HAL.
    5. Gao, Lu & Zhao, Xuan, 2015. "Determining intra-company transfer pricing for multinational corporations," International Journal of Production Economics, Elsevier, vol. 168(C), pages 340-350.
    6. Ronan Merle & Bakr Al-Gamrh & Tanveer Ahsan, 2019. "Tax havens and transfer pricing intensity: Evidence from the French CAC-40 listed firms," Cogent Business & Management, Taylor & Francis Journals, vol. 6(1), pages 1647918-164, January.
    7. James R. Hines & Eric M. Rice, 1994. "Fiscal Paradise: Foreign Tax Havens and American Business," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(1), pages 149-182.
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    Cited by:

    1. Theodoros Kounadeas, 2023. "The Effectiveness of Digital Payments in Tackling Tax Evasion in Greece," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(2), pages 3-21.
    2. H M Sifullah & Parvin Akater Shelly & Dr. Mohammad Nazim Uddin & Tanbina Tabassum & Md Ahsan Uddin, 2024. "Does Financial Leverage Impact the Financial Performance of Pharmaceutical Companies in Bangladesh?," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(2), pages 37-63.

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    More about this item

    Keywords

    Transfer pricing; tax evasion; tax administration; tax audits; Greece; affiliated companies; independent companies; VECM model.;
    All these keywords.

    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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