Transfer Pricing And Tax Base Erosion: A Literature Review

The paper examined transfer pricing and tax base erosion. To achieve this objective, a library-based approach was employed with a deep review of prior investigations on transfer pricing practices and their outcomes and how they were used to achieve tax base erosion. To this end, multinational companies (MNCs) are mainly the key players which adapt, set and adopt transfer prices that enable them to shift profit from high tax regions to low-tax jurisdictions. However, domestic group transfer pricing practices may also reflect sharp practices that allow them to minimize their aggregate tax liability. Common objects of transfer pricing abuse are found to be in transaction types in the form of intangibles, contracts, intra-company sales and purchases, management services, trade, cost sharing, amongst others. Therefore, price setting in the context of artificial price management is found to be entrenched in these objects. Given that such artificial price management, for all intents and purposes, are not based on arm’s length principles, it is deemed as tax evasion or scam which amounts to illegality. To this extent, transfer pricing is extensively used to erode the much-needed tax revenue of countries, Nigeria inclusive, where these MNCs operate. It is against this background that it is suggested that the government of every nation should ensure that adequate sanctions are institutionalized against erring companies through a regular review of transfer pricing regulations. It is also expected that local content laws should be updated and adequate in order to prevent unnecessary importation of inputs.