How are transfer prices and royalty payments used for tax avoidance?

This paper analyses how multinational enterprises (MNEs) use transfer pricing methods and royalty payments for tax avoidance. A description of the transfer pricing methods is given to respond to the research aim, evaluating its application in the manufacturing industry and analysing its potential applicability in the internet business to finally assess potential alternative rules. Due to the outdated tax codes created for traditional manufacturing industries, the actual framework requires evolution to digital economy aspects. Globalisation gives to MNEs the tools to shift profits within its subsidiaries between jurisdictions to those with the lower tax rates to take advantage and maximise after-tax profits. Despite the OECD actions to fight against base erosion and profit shifting (BEPS), individual countries are taxing MNEs in a different way addressing mainly the digital economy challenges (no physical presence and reliance on intangibles, among others). The European Union is, in percentage, the main looser due to tax avoidance payments. Although, the developing countries sacrifice by this practice a larger share of its revenue. Alternative rules on the short and long run appear as a country response and multilateral response, respectively