The accounting for transfer pricing and profit shifting in multinational companies: the case of Egypt

Abstract

There has been much discussion in the literature concerning the potential conflict over transfer pricing techniques used by MNCs to shift profits outside the borders of a host country. This happens whereby MNCs artificially lower their profits by manipulating transfer prices with their subsidiaries. They can achieve substantial benefits by adopting effective pricing policies. Careful planning of intra-company prices can take full advantages of differences among such things as corporation tax rates, tax incentives and reliefs and customs duties. The decade of the 1970s produced important economic changes in the Egyptian economy as a result of the economic open door policy. Since then Foreign Direct Investment (FDI) grew rapidly which reflects confidence in the Egyptian economy. Despite initiatives undertaken by the Egyptian government to attract greater inflows of FDI, greater efforts should be devoted to streamline and simplify the relevant administrative procedures of the government. Governmental policies and regulations could encourage multinationals to engage in transfer pricing manipulation more often in developing countries than in more developed countries. This is rarely due to the ignorance of the governments of developing countries to transfer pricing issues at the international level. Also, authorities concerned with the the issue are poorly equipped. The purpose of this study has been to investigate transfer pricing and profit shifting practices by MNCs doing business in Egypt. The case study approach has been used in the empirical work, including eleven companies. The investigation involved governmental authorities and an accounting firm that has an interest in the transfer pricing issue. The empirical study focused on factors influencing transfer pricing strategies which represent a motive to shift more profits from Egypt