Anti-Avoidance Regulatory Policy for International Transfer Pricing and Excess Debt Financing

Multinational companies can use transfer pricing and thin capitalization (excess debt financing) to reduce the amount of taxes paid in each jurisdiction. Governments try to counteract these anti-avoidance strategies by using tax policy rules. Since the means reducing the both types of activities are different, the question is whether they should fight these phenomena to the same extent or maybe they should concentrate only on the one of them. The last policy could be appropriate if one of the strategies has strong impact on the second. Using the simple economic model one can show that these two phenomena may coexist, especially when there are large differences in taxation between countries. It means that an effective anti-avoidance tax policy should use both types of law constraints. However, due to the higher requirements for transfer pricing vehicle the limitation of excessive debt use can be more effective than the restriction imposed on misuse of transfer pricing.