Social Scientist. v 12, no. 132 (May 1984) p. 24.

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declare its profits 1 and through overinvoicing of imports in 2, transfer profits to the parent. If t^ > t^, then the profits would be declared in 2., and the firm would underin voice its exports to the affiliate in 2. If t^ > ti, and t^ t^ > r^, the tariffs in country 2 (assuming no tariffs in 1), then the firm would overinvoicc its imports in 2, and transmit its profits to 1, scince the saving in taxes, represented by the tax differential, by not declaring profits in 2, is greater than the tariff cost in 2. However, if t^ > t^, t^ t^ < r^, then there would be no transfer pricing. Overinvoicing of imports in 2 would imply a tariff cost greater than the savings in taxes by not declaring profits in 2. The firm cannot underin voice its exports from 1 since that would imply not only a tariff cost but a tax cost as well. If t^ > t^ and t! ^2 ^> ^ then profits would be declared in 2, and the profits transferred from 1 to 2, through undcrinvoicing of exports from 1, which implies a reduction in the costs of the affiliate in 2, and a corresponding increase in its profits, as this would enable a tax saving greater than the tariff cost. If t^ ?> t^ and t^ t^ < r^, then underinvoicing of exports from 1 would not be feasible since the tariff cost would be greater than the tax savings. If there is an export subsidy, at a flat rate of s^, and i^ > t^, an<^ (t^ t^) -(- Si > r^, then there would be overinvoicing of imports in 2, since the resultant tax saving, combined with the export subsidy, would more than offset the tariff costs in 2. If, t^ > t^, and (t^t^) +51^ ^ ^cn tms would result in the underinvoicing of exports from 1.

Meeting Fixed Costs of the Parent

Vaitsos7 has argued for the use of transfer pricing by TNCs to transfer profits from the subsidiaries to the parent to meet the lattcr's fixed costs, such as R & D expenditures and managerial expenses, oriented to the global needs of the company, when the revenues of the parent from its sales in the home market and abroad fail to meet these costs, along with the direct costs.

If R is the revenue of the parent from sales and C its costs, direct and fixed, and R C <3 0, then, assuming that tariffs are zero and the corporate tax rates are identical in the home and host countries, it would pay to transfer funds from the subsidiary to the parent through transfer pricing rather than through remission of funds through dividends, since the funds remitted through transfer pricing would go to meet the costs of the parent and to that extent imply a reduction in the taxable income of the parent, while dividend remittances would mean prior payment of corporate taxes at the level of the subsidiary.8 If the parent only exports to the subsidiary, then through overinvoicing of imports by the subsidiary, the revenue (R) of the parent could be increased to meet C. If the parent imports as well, from the subsidiary, then the exports of the subsidiary, would be undcrinvoiced, reducing C, until it matches, the existing

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