Academic journal article Multinational Business Review

Global Transfer Pricing of Multinationals and E-Commerce in the Twenty-First Century

Academic journal article Multinational Business Review

Global Transfer Pricing of Multinationals and E-Commerce in the Twenty-First Century

Article excerpt

Today, multinational companies have awakened both to the fact that internationally accepted transfer pricing methods are no longer applicable to e-commerce cross-border activities and that their corporate financial officers and accountants must help in reducing the risk of transfer pricing tax audits of either Internal Revenue Service or host countries' tax authorities. As multinationals mange their cross border global business transactions, traditional transfer pricing for e-commerce transactions may be more difficult to apply to reduce their worldwide tax liabilities and globally integrate their production and marketing strategies. This study examines the challenges of ecommerce activities of multinationals and its impact on traditional transfer pricing.


Current transfer pricing tax regulations were written within the framework of national sovereignty in tax system before the discovery of e-commerce. Tax authorities consider ecommerce as a threat to revenues from traditional income tax systems and; therefore, they are pushed to ensure their tax system integrity by closing the loopholes for either tax avoidance or tax evasion through the use of ecommerce. On the other hand, corporate financial officers (CFO) and accountants who work for MNCs should ensure that their transfer pricing policies reduce the risk of audits. To protect their tax bases, tax authorities must ensure they collect a fair amount of corporate income tax from multinational corporations (MNCs) operating in their jurisdictions and have become more alert in enforcing the rules of transfer pricing. MNCs could face inconsistent and unfair treatment of cross-border transactions, double taxation and penalties for noncompliance with different tax regulations of different countries.

International transfer pricing of e-commerce transactions has not been discussed to the same extent as other important strategic business and tax issues. International transfer pricing is a subject that no MNC, regardless of size or location, can afford to ignore, and any MNC that thinks transfer pricing as simply as justifying and documenting the use of arm's length price are living in the past (Durst et al., 1999). The complexity of the issue might require MNCs to redefine and update their strategies to go with the new challenge of the information technology in the twenty-first century.

Maguire (1999) argue that e-commerce may not present new transfer pricing problems; it only magnifies exiting issues such as the valuation of intangibles and services, and compliance with documentation and information reporting requirements. Moreover, the Organization of Economic and Cooperation Development (OECD) still think that existing principles in dealing with e-transfer pricing transactions are adequate, and that e-commerce has not presented any fundamentally new problems for transfer pricing. However, due to rapid development in communications resulting in instantaneous transmission of information, tax administrations are concerned that it may become more difficult to identify, trace, quantify and verify cross border transactions, and there are difficulties in applying internationally accepted transfer pricing methods to e-commerce.

MNCs, tax authorities, and international organizations are at the crossroads of not being able to solve the complicated problems created by e-commerce and international transfer pricing transactions. As MNCs mange their cross border business transactions, transfer pricing methods and strategies for e-commerce may be more difficult to apply in reducing their tax liabilities and integrate their production and marketing strategies on a worldwide basis.

The purpose of this study is to examine ecommerce and its significant impact on transfer pricing techniques and tax strategies of MNCs.

First, the issues of choosing the right transfer price that fits the nature of cross-border ecommerce activities will be investigated. …

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