Determinants of transfer pricing aggressiveness: Empirical evidence from Australian firms q Grant Richardson a,⇑ , Grantley Taylor b,1 , Roman Lanis c,2 a School of Accounting and Finance, The Business School, University of Adelaide, 10 Pulteney Street, Adelaide, South Australia 5005, Australia b School of Accounting, Curtin Business School, Curtin University, GPO Box U1987, Perth, Western Australia 6845, Australia c School of Accounting, UTS Business School, University of Technology – Sydney, Corner of Quay Street and Ultimo Road, Haymarket, Sydney, NSW 2000, Australia article info Article history: Received 17 May 2012 Revised 10 May 2013 Accepted 3 June 2013 Available online 12 June 2013 Keywords: Transfer pricing Corporate tax avoidance Australia abstract This study examines the major determinants of transfer pricing aggressiveness. Based on a hand-collected sample of 183 publicly-listed Australian firms for the 2009 year, our regres- sion results show that firm size, profitability, leverage, intangible assets, and multination- ality are significantly positively associated with transfer pricing aggressiveness after controlling for industry-sector effects. Our additional regression results also indicate that firms augment their transfer pricing aggressiveness through the joint effects of intangible assets and multinationality. Ó 2013 Elsevier Ltd. All rights reserved. 1. Introduction The purpose of this study is to examine the major determinants of transfer pricing 3 aggressiveness as a means by which firms can significantly reduce their corporate tax liabilities. Multinational firms can structure and price payments and intra-firm trade in such a way as to facilitate tax avoidance, principally by strategically setting artificial inter-company transfer prices (Grubert and Mutti, 1991; Grubert, 2003; Clausing, 2006; Usmen, 2012). The aim of Australia’s transfer pricing rules is to ensure that related party international transactions are conducted on an arm’s length basis so that profits are not artificially deflated (inflated) in high-tax jurisdictions (low-tax jurisdictions) (Hamilton et al., 2001). Aggressive transfer pricing activity is reflected by extensive non-arm’s length transactions between related parties. We are motivated in this study to evaluate the major determinants of transfer pricing aggressiveness because audit activ- ity by tax authorities and economic analysis by treasury departments have collectively found that mispricing of related party transactions is a major factor contributing to a progressive erosion of corporate tax revenue. 4 Transfer pricing risks are con- sidered high-priority in Australia by the Australian Taxation Office (ATO) which recently requested information from 150 large (i.e. greater than AUD100 million turnover) corporate groups on: restructuring, financing relating to guarantee fees and intra- group loans, services provided and received, and related party transactions (ATO, 2010). These risk reviews stem from transfer pricing audits carried out by the ATO in 2001–2006 which resulted in amended tax assessments of AUD1.33 billion, with an additional AUD1.25 billion in disallowed tax losses (ATO, 2010). The nature and outcome of review and audit activity by the 1815-5669/$ - see front matter Ó 2013 Elsevier Ltd. All rights reserved. http://dx.doi.org/10.1016/j.jcae.2013.06.002 q The authors would like to thank the co-editor, Professor Ferdinand Gul, and an anonymous reviewer for their invaluable comments. ⇑ Corresponding author. Tel.: +61 8 83130582; fax: +61 8 82234782. E-mail addresses: grant.richardson@adelaide.edu.au (G. Richardson), grantley.taylor@cbs.curtin.edu.au (G. Taylor), roman.lanis@uts.edu.au (R. Lanis). 1 Tel.: +61 8 92663377; fax: +61 8 92667196. 2 Tel.: +61 2 95143081; fax: +61 2 95143669. 3 Transfer pricing is a system of laws and practices utilized by countries to ensure that goods and services are transferred amongst related parties at market- based prices so that profits are correctly attributable to different jurisdictions (Joint Committee on Taxation, 2010). 4 This is evident by a decline in effective tax rates (ETRs) and the increase in the number of firms reporting a zero or nominal corporate tax liability. Journal of Contemporary Accounting & Economics 9 (2013) 136–150 Contents lists available at SciVerse ScienceDirect Journal of Contemporary Accounting & Economics journal homepage: www.elsevier.com/locate/jcae