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Research On MNCs' Transfer Pricing And Government Regulation

Posted on:2012-12-24Degree:DoctorType:Dissertation
Country:ChinaCandidate:L B EFull Text:PDF
GTID:1116330371453900Subject:Industrial Economics
Abstract/Summary:PDF Full Text Request
As the scale of foreign investment in China continues to expand, multinational corporations (MNCs) play an important role in China's economic development. With the development of MNCs, there is growing concern about multinational transfer pricing issues. The related party transactions are popular among the different entities within MNCs. The transfer price between two entities within MNCs is different from the arm's length price between two independent enterprises. The transfer pricing influences our tax revenue, enterprises competition, and the equity ratio in joint ventures.Transfer pricing has been used by MNCs to evade tax. In 2009, China's tax authority recovered 2.09 billion yuan evaded by means of transfer pricing, four individual cases higher than 100 million yuan. Transfer pricing has also been used by MNCs to compete in price and production size with China's local enterprises and cause unequal competition environment for our national industries. Transfer pricing cause consecutive losses in many joint ventures, and at the same time foreign shareholders are seeking to enlarge their stakes in the joint ventures that result in decrease of Chinese stakes in the joint ventures. MNCs make full use of the cheap cost of labor, land, water and electricity to tap the regional cost savings. The maintenance or rapid growth of global profit of MNCs is largely due to the rapid growth of our market. But we did not claim the dividend of regional cost savings and rapid growth of market in the distribution of global profit of MNCs.So the design of proper government regulation and tax adjustment policies after finding out the decision mechanism of transfer pricing of MNCs will be helpful to guarantee China's tax revenue, maintain a fair competitive environment and enhance the overall welfare level. On the basis of review on the relevant literatures, this paper makes use of dialectical analysis and game theory analysis, and analyzes the actual situation of China with the relevant theories to find out the transfer pricing decision mechanism of MNCs, and with the view to maximize the social welfare, the paper explores to design reasonable regulation mechanism and tax adjustment policies. This thesis consists eight chapters, and is organized as follows:ChapterⅠ:It describes the research background and significance, and determines the research framework and structural arrangements, and cites the innovations and inadequacies.ChapterⅡ:It reviews systemically the relevant theory literatures on five aspects, including the strategies of multinational transfer pricing with the aim of tax evasion, strategies of multinational transfer pricing with the aim of competition strategies, strategies of multinational transfer pricing with the aim of equity ratio, the mechanisms of government regulation of the strategies of multinational transfer pricing, and the methods of tax adjustments of the strategies of multinational transfer pricing.Chapter III:It analyzes the influence factors of transfer pricing decision-making of MNCs, and pointes out that China's tax authorities should emphasize on three kinds of MNCs that are most likely to adopt transfer pricing, which are those who have direct link with tax havens, whose subsidiaries in China only performing a single function or being a puppet of the parent company.ChapterⅣ:It analyzes the strategic transfer pricing behaviors used by MNCs to seize China's market shares. Based on the framework of Cournot duopoly competition analysis in a single market, extending to the multinational transfer pricing decision-making under the perspective of Cournot duopoly strategic in double market, the paper tries to explore our development strategy to safeguard the competitive advantage of national enterprises. The research finds that in order to tackle the strategic transfer pricing of MNCs, we should turn the passive defense in domestic market to aggressive attack in foreign market. So the government should encourage the enterprises to invest boldly abroad, and win the opportunities of fair competition and regain the market share and solve the problem of industry loss.ChapterⅤ:It analyzes the abnormal phenomena between profit status and ownership change in China's joint ventures. This paper builds a two-stage game model, and combines the evolution of MNCs'equity ratios in China's joint ventures with the transfer pricing, and reveals the equity ratio effect caused by transfer pricing of MNCs, and analyses the dynamic strategy of MNCs to the equity of China's joint ventures. The paper proposes the establishment of the Industry Support Funds, which will take over the increased stakes in the joint venture that the Chinese partners cannot afford and thus restrain the MNCs's motivation of raising equity ratio through transfer pricingChapterⅥ:It explores how host governments regulate transfer pricing of MNCs incentive-compatibly under asymmetric information, and points out that it is of key importance to improve capacity of law enforcement of tax authority, including strengthening team construction, carrying out unite industry inspection, requiring enterprises to offer data of the same term, vigorously promoting an advance pricing and aggravating punishment on violations to the law.ChapterⅫ:It explores how to choose the weight index and ratio in line with our national conditions in Formula Apportionment. As a "world factory", China plays a relatively particular role in the international division of the value chain, and has the distinctive production and sales pattern. On the assumption that there exists difference between two countries in the national resources endowment and income tax rate and with the aim of the maximization of social welfare, the paper builds game model on the index of weight of two countries and finds out that each country would take in consideration not only the direct tax effect but also the indirect effect resulted from global investment adjustment and employment layout of MNCs. Generally speaking, the investing country tend to reduce the weight ratio of inputs and increase the weight of sales revenue while the host country need to seek the balance between the inputs and the sales revenue, which is influenced by the difference of market sizes of host country and investing country and the sensitivity of output to the selected indicators.Then, it tries to clear the concept of regional cost saving and market dividends and quantifies them, and analyze how to determine the belongings of the regional cost savings and market dividend, and oppose that the foreign parent companies of MNCs use the intangible assets or investment risk as an excuse to share the additional profit brought by the regional cost savings and market dividend.ChapterⅦ:It summarizes the text, and puts forward the main conclusions and the corresponding policy recommendations.This paper has the following three innovations:First, in the research of the strategic transfer pricing decision-making model of MNCs, the paper extends the Cournot duopoly competition analysis in a single market to the Cournot duopoly competition in double markets, and makes researches on the strategic transfer pricing decision-making model of MNCs while the two countries have made cross investments.Second, this paper builds a two-stage game model, and reveals how the MNCs used the dynamic strategy of transfer pricing to seize the equity of Chinese partners.Third, based on the actual situation of our country, the paper analyzes the relation between the selection and weight of indicators in the Formula Apportionment and our social welfares.As the economic situation of our country change constantly and there is a variety of factors which influence the transfer pricing of MNCs, it is hard to grasp its complexity and dynamic totally. So there are still many important issues of the subject which have not been involved in this paper and left for further research.
Keywords/Search Tags:Multinational Corporations (MNCs), Transfer Pricing, Social Welfare, Government Regulation, Tax Adjustment
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