Economic and Institutional Drivers of Transfer Pricing: A Global Perspective

Transfer pricing is now one of the most important problems within the international taxation domain due to the strategic approach of multinational companies in manipulating the intra-group transactions in the business process to reduce these taxes, and how they try to redistribute the benefits away from the taxation jurisdictions and high tax platforms. This study focuses on the interlocutor variables of the transfer pricing decision and pays attention to the corporate tax rates, economic development and trade openness, and institutional quality in 95 countries over the years 2014 to 2024. A variety of advanced panel econometric techniques are employed in the analysis, which employ tests of unit root, Pedroni cointegration tests, Fully Modified and Dynamic Ordinary Least Squares, or panel least squares in the study, to distinguish between the long-run equilibrium relationship and the short-run dynamics. Results suggest that as corporate tax rates get higher, they provide more of an incentive for profit gains to get diverted and so result in declining gains of corporate income tax revenue, and the higher the level of economic development and openness of the trade, the more robust the capacity to tax. Institutional quality, however, fails to show a consistent effect to suggest that institutional reforms - governance reforms - were not part of a broader structural reform within a country. Short-run models also support the notion that economic growth and integration via trade cause stronger corporate tax revenues, and changes in statutory tax rates for companies, or indicators of governance, do not have an immediate impact. These findings highlight the fact that transfer pricing does not stand in an isolated sphere of economic and institutional circumstances, and hence is not just a by-product of tax policy. The study concludes that the protection of national tax bases requires a multifaceted approach of a combination state regime-composed of competitive design of taxes, trade-enhancing approaches, robust enforcement, and capacity-building type reforms to reduce vulnerabilities to global profit-shifting practices.