Transfer pricing abuses affect not only state’s taxation rights, but also the view of companies’ performance. The large amounts involved by such practices are of growing concern for authorities at the national, European and international level. The relevant regulations that emerged from such concerns allow tax authorities to recalculate the assessable income, following tax inspections. However, tax authorities cannot modify company’s financial statements. Transnational companies may be tempted to use intra-company transactions’ pricing for profit transfers among related entities, in order to avoid taxation in certain countries or to improve certain affiliates’ image. The purpose of this article is to discuss the way in which transfer pricing allows manipulating company’s performance, especially in the case of foreign affiliates. The main finding is that the financial and reporting standards can only partially restrict such possibilities, the relevance of an economic and financial analysis being implicitly affected. As long as establishing a fair transfer price largely remains company’s choice, it constitutes rather an issue of ethics in respect to financial information users, which may in turn depend on whether the company adopts a corporate responsible behaviour or not.

The article starts with a brief discussion about the importance of transfer pricing practices and regulations in terms of impact on host economies as well as on transnational companies. It then analyses the way in which transfer pricing can be used to manipulate companies’ performance for two main purposes: avoiding home country taxation in the case of a parent company; and improving the image of a foreign affiliate’s performance. The third section discusses the way in which transfer pricing abuses can be brought into light for taxation purposes, as to allow assessable income adjustments, as well as for accounting purposes, through the application of different consolidation methods. We conclude that consolidated results can be affected by intra-company transfers in the case of associates and joint ventures, and that in any case the individual financial statements of the affiliates are compromised if transfer pricing is abusive. We also note significant differences in defining foreign affiliates for taxation, accounting and direct investment statistics purposes, which creates even more difficulties in assessing the nature of the relationship that underlies intra-company transactions. Based on this findings, we conclude that the current taxation and accounting regulations have a limited capacity of preventing and resolving transfer pricing abuses, and that financial information users, in particular financial analysts, are implicitly affected by such limits. In this context, the adoption of an ethical behaviour by the transnational companies remains a crucial pre-condition for a fair view of their performance.