Development of an Optimal Geographical Location Index to Reduce Transfer Pricing Risks

• Published in: Montenegrin journal of economics 2023-04, Vol.19 (2), p.59-72
• Main Author: Melega, Anatol
• Format: Article
• Language: English
• Subjects: Corporate taxes; Econometrics; Economic development; Global economy; International trade; Jurisdiction; Market prices; Multinational corporations; Political risk; Profits; Related parties; Tax rates; Taxation; Transfer pricing
• ISSN: 1800-5845; 1800-6698
• DOI: 10.14254/1800-5845/2023.19-2.5

The aim of this theme is to identify a solution to support companies wishing to set up a subsidiary in a particular country or area of the world other than their home country where they can benefit from the tax advantages considered optimal by those companies. In order to achieve the proposed goal, we have set the following objectives: analysis of the defining framework, of the transfer pricing assessment methods existing at international level and of the methods for setting these prices; analysis of the BEPS action plans from the perspective of transfer pricing according to OECD guidelines, by providing theoretical and practical knowledge; examining how transfer pri-cing is used as a practice to reduce the taxable base at the level of multina-tional groups. In the first stage of the research, the necessary data has been collected to construct the working sample, consisting of 157 countries located in the main regions of the world. In this stage, information consi-dered relevant by the authors on the influence of multinationals to open a subsidiary in a given country (information on tax pressure and burden and country risk) was identified and selected. In the second stage of the rese-arch methodology, after applying the inclusion and exclusion criteria, 76 countries located in different regions of the world remained in the race. The dependent variable is the geographic location index in terms of transfer prices, determined by a linear multiple regression method that includes as independent variables the following indicators: GDP, country risk, corporate tax rate and country-specific sovereign CDS (credit default swap). The obta-ined results consist in the development of an econometric model to Identify the areas considered the most optimal in terms of the levied taxes and country risk for multinational companies wishing to open a new subsidiary in another country.