European Financial and Accounting Journal
European Financial and Accounting Journal
European Financial and Accounting Journal
Faculty of Finance and Accounting, University of Economics, Prague

European Financial and Accounting Journal 2009/2

Detection of Possible Tax-Evasive Transfer Pricing in Multinational Enterprises

[full text (PDF)]

Jaroslav BRADA, Tomáš Buus

In this paper we analyze possible source of tax evasion in the multinational entity (hereinafter “MNE”). We show that the tax obligation of the whole MNE depends on the ownership structure of companies, which form MNE and that the structure could be described by matrix form. Therefore the basic tax optimization tasks of MNE via transfer pricing can be understood as linear programming problems. In addition we propose a way to identify possible tax evasion realized via transfer pricing in MNE.

Keywords: Linear programming, Mathematical taxation, Multinational entities, Tax authorities, Tax evasion, Transfer prices

JEL Classification: D21, D29, G39


[1] Baldenius, T. – Melumad, Nahum D. – Reichelstein, Stefan J.

(2004): Integrating Managerial and Tax Objectives in Transfer

Pricing. Accounting Review, 2004, vol. 79, no. 3, pp. 591-615.

[2] Bartelsman, E. J. – Beetsma, R.M.W.J. (2003): Why Pay more?

Corporate Tax Avoidance through Transfer Pricing in OECD Countries. Journal of Public Economics, 2003, vol. 87, no. 9, pp.


[3] Bernard, A. B. – Jensen, J.B. – Schott, P. K. (2006): Transfer Pricing

by U.S.-based Multinational Firms. [on-line], Washington, D.C.,

National Bureau of Economic Research Working paper 12493,

c2004, [cit. 1st October, 2009],


[4] Bond, E. W. – Samuelson, L. (1989): Strategic Behaviour and the

Rules for International Taxation of Capital. The Economic Journal,

1989, vol. 99, no. 398, pp. 1099-1111.

[5] Buus, T. – Brada, J. (2008): On the Necessity of Using Average Cost

as a Base for Transfer Price. European Financial and Accounting

Journal, 2008, vol. 3, no. 3, pp. 79-94.

[6] Eden, L. – Rodriguez, P. (2004): How Weak Are the Signals?

International Price Indices and Multinational Enterprises. Journal of

International Business Studies, 2004, vol. 35, no. 1, pp. 61-74.

[7] Gatti, J. F. – Grinnell, D. J. – Jensen, O. W. (1997): Replicating a

Free Market for Internal Transactions: An Alternative Approach to

Transfer Pricing. Journal of Business & Economic Studies, 1997,

vol. 3, no 2, pp. 43-62.

[8] Gresik, T. A. (2001): The Taxing Task of Taxing Transnationals.

Journal of Economic Literature; 2001; vol. 39, no. 3, pp. 800-838.

[9] Haufler, A. – Schjelderup, G. (2000): Corporate Tax Systems and

Cross Country Profit Shifting. Oxford Economic Papers, 2000, vol.

52, no. 2, pp. 306-325.

[10] Hirshleifer, J. (1956): On the Economics of Transfer Pricing. Journal

of Business, 1956, vol. 29, no. 3, pp.172-184.

[11] Keen, M. – Wildasin, D. (2004): Pareto-Efficient International

Taxation. American Economic Review, 2004, vol. 94, no. 1, pp. 259-


[12]Mansori, K. S. – Weichenrieder, A. J. (1999): Tax Competition And

Transfer Pricing Disputes [on-line], New York, Social Science

Research Network, c1999, [cit. 1st October, 2009],


[13] OECD (2001): Transfer Pricing Guidelines for Multinational

Enterprises and Tax Administrations. Paris, Organisation for

Economic Co-operation and Development, 2001.

[14] Pappas, J. L. – Brigham, E. F. – Hirschey, M. (1983): Managerial

Economics. Dryden Press. Chicago, 1983.

[15] Raimondos-Moller, P. – Scharf, K. (2002): Transfer pricing rules

and competing governments. Oxford Economic Papers, 2002,

vol. 54, no. 2. pp. 230-246.

[16] Sansing, R. (1999): Relationship-Specific Investments and the

Transfer Pricing Paradox. Review of Accounting Studies, 1999,

vol. 4, no. 2. pp. 119-134.

[17] Schjelderup, G. – Weichenrieder, A. J. (1999): Trade, Multinationals

and Transfer Pricing Regulation. Canadian Journal of Economics,

1999, vol. 32, no. 3, pp. 817-834.

[18] Schmallenbach, E. (1908): Über Verrechnungspreise. Zeitschrift für

handelswissenschaftliche Forschung 1908, vol. 3, no. 4, pp. 165-185.

[19] Soukup, J. (2003): Mikroekonomická analýza – vybrané kapitoly.

Melandrium, Slaný, 2003.

[20]Wellisch, D. (2003): Internationale Verrechnungspreismethoden,

Neutralität und die Gewinne multinationaler Unternehmen.

Jahrbücher für Nationalökonomie und Statistik, 2003, vol. 223, no. 3.

pp. 332-359.

[21] Steven, R. (2005): Advanced Linear Algebra. New York, Springer,