SRIDHAR KRISHNA* A Note on Transfer Pricing — Some Theoretical Issues and Empirical Evidence TRANSFER PRICING is an instrument for transfer of financial resources between units of a transnational corporation (TNC) through either overinvoicing of imports or underinvoicing of exports. Transfer pricing refers to not only the pricing of infra-firm trade in goods, bui also technology, services and credit. Transfer pricing needs to be distinguished from the faking of foreign trade declarations1 which occurs in the trade between unrelated parties, acting in collusion, and where the transfer of resources is not necessarily implied. The direction of invoicing is irreversible in the case of transfer pricing. In the faking of invoices, however, the direction is reversible. Where the subsidiary is transferring its resources to its parent, through overinvoicing of imports, tariffs would not alter the direction of invoicing, while in the case of trade between unrelated parties, it would result in the underinvoicing of imports.2 The reversibility of transfer pricing could however occur with respect to the direction of capital flows.3 If the structure of corporate taxes between countries alters in a manner as to alter the incentive to declare profits in a particular subsidiary, rather than its affiliate, where the profits were being declared earlier, then instead of the former overinvoicing its imports, the latter would now underinvoice its exports.4 Tax Differentials, Tariffs and Subsidies Thomas Horst5 argues the inducement to transfer pricing arising from the relative effects of international corporate tax differentials, tariffs and subsidies, and Kopits6 has some evidence in support of this at least for the intra-firm trade in intangibles. Horst's argument presupposes a given structure of international production and direction of intra-firm trade among affiliates of a TNG. If the parent in country 1 exports to its affiliate in country 2 and the corporate tax in 1 (t^) is less than that in 2 (t^), the firm would ^Research Scholar, Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi.