Detecting tax motivated transfer pricing

This paper provides a method for analysing publicly available financial statement information in order to detect tax-motivated transfer pricing. The key components to the analysis are permanently reinvested earnings, discretionary uncertain tax benefits, and the difference between domestic and foreign tax rates. Extant research indicates that both permanently reinvested earnings and uncertain tax benefits are influenced by transfer pricing. This study demonstrates that the relationship between permanently reinvested earnings and discretionary uncertain tax benefits is moderated by the tax rate differential. The tax rate differential provides companies with the incentive and opportunity to engage in tax-motivated transfer pricing. Finding that the tax rate differential moderates the impact of discretionary uncertain tax benefits on permanently reinvested earnings suggests that companies are engaging in tax-motivated transfer pricing.