billions of dollars go untaxed every year. Developing countries need foreign inflow of investment and the treaty shopping opportunities prove to be an additional factor to attract them. The underlying cause is that the developing countries are in most cases highly benefited in terms of capital and technology which provides impetus to its overall socio-economic development. The loss of revenue is very small as compared to the benefits that arise by treaty shopping. It has come to be known as a necessary evil for the developing nations. These practices are also seen as precursors of growth of the 本文来自辣.文,论-文·网原文请找腾讯324-9114 country.As of now many developing nations are at a very delicate position, even if they want to curb these practices, this cannot be possibly done without a considerable decrease
in the foreign investment.
Transfer pricing.
One often used method of shifting away profits is so-called transfer pricing. Transfer pricing simply refers to the prices used as the accounting basis for recording intra- corporate transactions (i.e., those between TNC parents and their subsidiaries or branches, or between such subsidiaries). It is the setting of prices in transactions between divisions and companies belonging to the same multinational. Transfer pricing has become more and more important, since the number of multinationals and subsidiaries has grown enormously a lot of these companies are managed on intra-
national or even global lines, not national ones. More than 60% of world trade takes
place through Multinational corporations therefore the understanding of the concept of transfer pricing becomes very important. In 1990’s the OECD group released transfer pricing guidelines on the basis of arms length principle. This principle enumerated that the prices of intra group transaction should be comparable to that of independent
entities.
Arms length standard is a transaction based approach and requires the MNC to report to the tax authorities every single transaction with an affiliated entity as if it was done with an independent entity. It is the attribute of every MNE that they flourish in those industries where they have the ability to survive via a cost effective mechanism. When a MNE carries out the integrated business, it cuts out on the R&D expenses, management
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