Paper short abstract:

We analyze how multinationals have reacted to recent changes to legislation related to transfer pricing with a specific focus on developing countries.

Paper long abstract:

In recent years, transfer pricing regulations have seen uneven progress across countries, especially the developing ones. In this paper, we analyze the changes in the MNEs' behavior following major changes to legislation that regulates the way transfer prices are set between related companies based in tax havens and in other countries. We build on and extend the approach of Marques and Pinho (2016) to quantify the strictness of transfer pricing regulations in tax havens as well as non-havens and hypothesize that MNEs react to changes in these regulations by adjusting the prices for intra-firm traded goods and services accordingly. Specifically, we argue that changes in the relative strictness of transfer pricing regulations can explain a part of the differential in the reported profits of affiliates in low- and high-tax jurisdictions.