Tax Policy and FDI - Influence of Transfer Pricing

Hall mark of Globalization is the emergence and dominance of Multinational Corporations(MNCs). Foreign Direct Investment (FDI) implies minimum two entities-mostly incorporated- situated in two different nations. The transactions between these entities that are having common control and management of running of these entities give rise to the question of how to decide the price of commercial transactions between them, since they are not happening in an open market but occurring within the same group. This is the issue of transfer pricing. Tax differentials between two tax jurisdictions are expected to cause transfer pricing manipulations resulting into profit shifting from high tax jurisdiction to low tax jurisdiction. Tax policy of a Government can affect the pre-investment decision of an enterprise about the locational choice as well as post investment decision of the investor as to where to show the profit; either in the host country or in home country or in some other country if the foreign direct investor has establishments in more than two countries. Therefore Tax Policy, FDI and Transfer Pricing are closely connected issues. This book analyses the linkages between these concepts theoretically as well as empirically using primary as well as secondary data. India is actively promoting FDI. This book also examines the performance of FDI in India and how and why it is distributed across different states. The legislative and administrative measures used by Government of India and the prevalent legal and governmental practices followed by other Nations to protect the revenue base and the short comings of these measures are discussed in this book.