An Empirical Research On Influencing Factors Of The Transfer Pricing Of Chinese-Listed Companies

Recently, transfer pricing has always been concerned in academic circles. Investigate its reason, on the one hand, attention to transfer pricing was rooted in international tax assignment after the emergence of multinational corporations. On the other hand, as the continuous improvement of accounting standards has been diminishing the chances of earnings management through the selection of accounting policies, changes in accounting estimates, earnings management by related transaction has become the preferred method in the listed companies. nowadays driven by various motives, business groups are increasingly tempted to use related transaction for reducing the burden of taxation, manipulation of earnings and prettifying financial reports. Related transaction is a neutral economic phenomenon, which is intended initially to lower transaction costs and develop organizational coordination function. The prices in related transaction i.e. transfer pricing, is an important index to measure whether a related transaction is normal or not.This paper takes normative research and demonstration research as the research methods and investigates how income tax rate, financial reporting and government ownership affect use of transfer pricing to manage earnings in listed companies. The enterprise income tax rate in our country is25percent, however, the central and local governments offer a series of tax incentives and tax reductions to firms for a variety of reasons. So there are probably different levels of income tax rates within an enterprise group. In order to reduce the overall tax burden, the listed companies have strong incentives to change the profit distribution pattern by operating transfer prices. In listed companies that implement equity incentive policy, managerial stockholding means that the level of management compensation is related to reported earnings, in order to pursue better individual pay, managers also have incentives to operate transfer prices for increasing reported earnings. The unique ownership structure of listed state-owned enterprises (SOEs) may affect income shifting practices as well. SOEs share more social resources and have more pressure to fulfill the social responsibility. The parent SOEs may tunnel profits from the listed firms by forcing raise or lower transfer prices. This paper focuses on how income tax rate, managerial stockholding and government’s ownership affect transfer pricing in listed companies driven by motivation to reduce the tax burden, management equity incentive and tunneling activities. On this basis, we also take a further research on when two incentives coexist, whether their effects offset each other. The empirical results show that if managers’bonuses are linked to the firm’s reported earnings or if the listed company enjoys a reduced corporate tax rate, the firm is more likely to shift profits into the listed company through transfer pricing manipulation. On the other hand, if the local or state government controls the listed company, it is more likely to shift profits out of the listed company through transfer pricing manipulation, and the shifting of profits increases with the percentage ownership of the controlling shareholder. Firms consider both tax savings and tunneling when making transfer pricing decisions. There is no evidence of one incentive dominating the other incentive when the tax saving and tunneling incentives are in conflict within a firm. The findings helps investors get a better understanding of transfer pricing practices, the conclusions from our study will help inform public policy makers and regulators in their on-going quest to reform the capital market by providing insights such as the impact of tax incentives on the earnings management behaviors for government-controlled and private-owned enterprises.