Tax Αvoidance and Transfer Pricing Evidence from Greece, a VECM regression model

The recent financial crisis, which in many countries as well as in Greece turned into a fiscal crisis, turned the attention of the international economic community to the issues of taxation and especially to the taxation of Multi-National Companies (MNCs). The question for the authorities is how to measure tax evasion by companies and in this context some proposals were formulated by official bodies such as the OECD (2015). The importance and impact of transfer pricing is significant in the modern economy, as multinationals account for more than 60% of world trade. Therefore, the respective tax administrations enact laws and enforce regulations on the documentation of intra-group transactions and the control of the transfer of profits, in order to comply with the "principle of equal arms" (Sun, Li and Zheng, 2017). Although transfer pricing has been an issue in the spotlight in recent years, there is no specific methodology for calculating and recording its potential gains for the companies. For this reason, many different approaches have been proposed in the international literature, which even though they utilize similar elements and variables, they usually focus on different aspects of the issue. However, the use of profit ratios to assess the effects of intra-group transactions is a common practice in the international literature such as those of Amerighi (2013), Gupta (2012), Gao & Zhao (2015) and Merle, Al-Gamrh and Ahsan (2019). Our research is important in the field of tax compliance in Greece, as it is one of the few efforts to approach the process of transferring profits through intra-group transactions between affiliated companies by examining the tax incentives related to pricing decisions between affiliated and independent companies. In the empirical part, will be investigated whether the affiliated companies, through intra-group transactions, shape their taxable results according to the respective tax environment and the applied tax policy. Our data consist of 2,131 companies from almost all sectors of the Greek economy, of which 971 are independent and 1,160 are affiliated with other companies. The total sample consists of 17,048 observations, of which 7,768 refer to independent companies and 9,280 to affiliated companies. The examined years of the research are from 2010 to 2017.  The research in the relevant literature did not reveal corresponding studies for the Greek market, although Greece is a typical example of a growing economy integrated in the euro area. It should also be noted that in Greece there is no corporate group tax, another reason that leads companies that belong to a multi-national group to manage their profits in order to avoid tax, or transfer their profits to other loss-making affiliated companies. Based on relevant studies and adjusting the corresponding model in the context of the Greek reality, we will use the net profit and Berry ratios of companies that belong to a group or are affiliated and companies that are independent, to analyze the pricing strategies of affiliated companies. The empirical research will consist two parts and is based on the data retrieved from the AMADEUS ( A nalyze MA jor D atabases from EU ropean S ources) Tp-Catalyst (TP 96, March 2018 edition) database. In the first part, descriptive statistics and hypothesis testing of the sample variables will be implemented. In the second part, short-term and long-term regression models will be created using a vector error correction model (VECM) with two lags. Robustness checks will be implemented in order to include the most appropriate variables in the models and produce more significant outcomes.  Our research intend to prove that affiliated companies show lower profit margins, have a lower tax burden and a lower Berry ratio than independent companies and there are significant differences in the taxable material of affiliated and independent companies. Our findings can be potentially helpful to the authorities to monitor and control transfer pricing and tax evasion.