Multinational companies avoid taxes by manipulating product pricing (i.e., transfer pricing), mainly by taking advantage of the tax rate differences between different countries to transfer profits to regions with lower tax burdens. Here are some common methods: ### 1. Transfer Pricing When multinational companies trade goods, services or intellectual property within the group, they can artificially set transaction prices. For example: - **High-price sales**: The parent company sells products to subsidiaries at prices higher than the market price, resulting in increased profits in the parent company's location and reduced profits in the subsidiary's location. - **Low-price purchases**: The subsidiary purchases products from the parent company or affiliated companies at prices lower than the market price, thereby reducing the taxable profits in the subsidiary's location. ### 2. Profit shifting By setting up subsidiaries or affiliated companies in countries with lower tax rates, multinational companies can shift part of their profits to these countries. For example: - **Intellectual property transfer**: Companies transfer intellectual property rights such as patents and brands to affiliated companies located in low-tax countries and charge high royalties to reduce taxable profits in high-tax countries. - **Service Fees**: The parent company charges management fees, technical service fees, etc. to the subsidiary company, increasing the profits of the parent company's location while reducing the taxable profits of the subsidiary company's location. ### 3. Double Irish with a Dutch Sandwich This is a tax avoidance structure commonly used by some multinational companies in the past. By transferring profits between Ireland and the Netherlands, the profits are then directed to low-tax or tax-free areas, such as the Cayman Islands. This structure can minimize the tax burden, but due to the supervision of tax authorities and the update of regulations, the use of this structure has decreased in recent years. ### 4. Profit Splitting Companies ensure that more profits are concentrated in low-tax countries by allocating profits and costs in different countries. For example: - **R&D Cost Allocation**: A large amount of R&D activities and costs are allocated to high-tax countries, thereby reducing the taxable profits in these countries, while the benefits of R&D results are concentrated in low-tax countries. ### 5. Related-party Transactions and Market Pricing Taking advantage of the pricing differences in different national markets, multinational companies can set lower sales prices in high-tax countries and higher purchase prices in low-tax countries, thereby achieving profit shifting. ### Compliance and Supervision Although the above methods are legal to a certain extent, tax authorities of various countries and international organizations (such as the Organization for Economic Cooperation and Development (OECD)) are strengthening the supervision of transfer pricing to ensure that companies set prices in accordance with the "Arm's Length Principle". This principle requires that the transaction prices between related companies should be consistent with the transaction prices under independent market conditions to prevent profit transfer. When implementing cross-border pricing strategies, companies should comply with relevant laws and regulations to ensure transparency and compliance to avoid legal risks and reputational damage.