Classification of transfer pricing systems across countries

This paper analyses the characteristics of transfer pricing (TP) rules across countries to create a classification of TP systems based on regulatory similarities. We apply hierarchical clustering method for the analysis of 57 qualitative and quantitative TP characteristics. Our sample comprises 44 countries for the period of 2010–2016. Our results indicate the existence of four distinct TP systems. The largest group is composed of countries with TP rules that are consistent with the OECD TP guidelines, while the other three groups include countries with domestic provisions that are substantially different from the baseline OECD standards. Overall, characteristics related to the priority of TP methods, to advanced pricing agreements and to the efficiency of competent authority procedures are the most relevant differences among groups. Simple applications of our TP classification indicate a systematic association between TP systems and income tax rates, suggesting a trade-off with respect to governments’ policy preferences between TP rules vs. tax rates. Our analysis contributes to the current literature as it provides a non-ordered classification of TP systems that is significative and consistent for the complete period, and has the advantage of being more robust methodologically and not depending on assumptions about the enforcement of specific tax provisions. Our results provide relevant information about the key differences on TP rules across countries and thus support the review of existing anti-shifting mechanisms as proposed by the OECD.