The last 20 years have been characterized by a dramatic growth of the multinational enterprise (MNE). As MNE trade expands more trade and pricing will be governed by the multinational and not by the free market. These prices for goods traded by two subsidiaries of the same MNE are called transfer prices. As a result of being internally determined, prices can be altered to shift profits from country to country for the purpose of tax and tariff avoidance, foreign exchange control avoidance, or for competitive reasons. Unfortunately, there is little data available to characterize the MNE's choice of transfer prices, although there have been a number of descriptive studies examining the extent of alleged transfer pricing abuses.;A global profit maximizing MNE is examined showing the influence of relative tax and tariffs on the transfer price. By imposing fiscal bounds on the transfer price, an estimatable equation of MNE behavior is derived. Foreign exchange controls, degree of risk, and the percentage of multinational trade are added to the model in a less formal way.;The model is tested using Census data on U.S. imports for 1978, from which relative transfer prices are determined for each product category and country of export to the U.S. The empirical results find that when the profit maximizing MNE is induced because of tax and tariff reasons to lower the transfer price the data is consistent with a reduction. Exchange controls on capital transactions are not as significant. The risk variable is consistent with the hypothesis that a lower level of profits is shifted through internal transactions out of the riskier countries than out of the less risky ones. Furthermore, the relative transfer price is lower for every increase in the amount of MNE trade within a particular product and country classification.;These empirical results provide support for the belief that differences between the transfer price and the market prices reflect tax, tariff, exchange control, risk and degree of MNE trade factors. However, from an examination of the coefficients of the models, it does not appear as if added controls on the MNE are necessary. No doubt there are some transactions, or industries that do alter transfer prices to a great extent, but on average the MNE appears to keep transfer price alteration--attributable to taxes and tariffs, exchange controls, risk and degree of MNE trade--to a minimum.;The purpose of this dissertation is to provide empirical evidence on transfer pricing behavior for U.S. imports. The study is concerned with the relationship between the transfer price and taxes and tariffs, exchange controls, riskiness of a country, and extent of MNE trade.
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