What is transfer pricing?

Transfer pricing is a technique used by multinational corporations to shift profits out of the countries where they operate and into tax havens that involves a multinational selling itselfs goods and services an artificially high price. By using its subsidiary in a tax haven to charge an inflated cost from its subsidiary in another country, eg buying boxes of pens from the tax haven-based subsidiary for $200 for a pen, the multinational corporation “moves” its profits out of the country where it genuinely does business and into a tax haven where it has to pay very little or no tax on profit.

Another example: let’s say it costs a multinational corporation $100 to produce a crate of bananas in Ecuador. It then sells that crate to an affiliate located in a tax haven for $100, leaving no profits in Ecuador. The tax haven affiliate immediately sells that crate on to an affiliate in Poland for $300, leaving $200 profit in the tax haven. That Polish affiliate sells the crate at the genuine market price of $300 to a supermarket, leaving no profits in Poland.

As a result, the multinational pays no tax in Ecuador and no tax in Poland, and the $200 in profits shifted to the tax haven do not get taxed.

In this way, multinational corporations avoid their responsibility to pay tax and fail to contribute to the societies in which they operate.