According to this rule, tax liabilities are calculated on the basis of market prices for transactions between interdependent taxpayers, as if companies were independent (“at arm’s length”). This principle has been adopted as a way to protect the state in obtaining taxes.

W.Cheng and D. Zhang comment on this international legal provision and emphasize that the attempt to regulate profits by specifying the terms and conditions to be achieved between independent enterprises in comparable transactions and under comparable circumstances (i.e., in “comparable noncontrolled transactions”) according to the “arm’s length principle” ensures the compliance with the approach to satisfying TNC members as if they were separate entities, and not inseparable parts of a single unified business. This is due to the fact that in such a case, the attention is focused on the nature of the transaction between these members and under the conditions that differ from those that will be recognized in comparable uncontrolled transactions. Such analysis of controlled and uncontrolled transactions is the core of applying the “arm’s length principle” [8].

It is necessary to note that the “arm’s length principle” can be implemented differently in national legislation. Taking into account this fact, there are several variants used by states. Firstly, this is the approach when this principle is explicitly expressed and normatively defined in the national legislation. Secondly, the principle under consideration may be expressed, but formally undefined in regulatory legal acts. Thirdly, there may be the situation when this principle is not expressed in the legislation, but related legal doctrines are applied. Fourth, some states do not legally enshrine the principle under consideration in law, but at the same time they empower tax authorities to adjust the income (profit) of taxpayers in order to display it correctly [8].

The development of TNC as a form of organizing production relations caused a certain transformation of the “transfer price” concept. The concept of “transfer price” is increasingly used to denote the price at which goods and services are transferred between economic entities that are a part of a certain TNC. Thus, the concept of “transfer price” covers international market relations [9].

TP is stipulated by the expansion of TNC international operations. In practice, it is related to pricing goods, services, know-how and intellectual property that are transferred across borders within corporate networks. The prices such assets are transferred at determine the income of both parties and, thus, the tax base of the relevant countries. Theoretically, if the calculated transfer price provides a reasonable distribution of income, the tax authorities of both countries receive a fair share of tax revenues. However, any TNC may want to take advantage of various levels of taxation and “pump over” its income into the country with a lower level of taxation.

It is reasonable to consider the essence of TP in the context of economic interests of various subjects of this process. Depending on their role in this process, these subjects are international and national companies, as well as government bodies.

As a result of applying the TP system, companies can get considerable benefits and meet their own economic interests that are not only related to the increase in income, but are more complex.

In general, the main reasons for the companies participating in TP include the following:

1) Optimization of activities: tax optimization (reduction of the tax burden) and efficient distribution and allocation of assets,

2) Control over supply and demand within the company,

3) Keeping trade secrets when transferring technologies within the company,

4) Improving the company competitiveness in target markets,

5) Improvement of the company’s consolidated financial result, in particular, the efficient use of transfer prices subject to applying international accounting standards, and

6) Efficient placement of investments and credit resources.

State bodies have the following motives related to TP:

1) Increase in budget revenues by regulating TP,

2) Protection of national producers,

3) Creating the same competitive conditions for companies in the national market, and

4) Avoidance of maladjustments in the payment balance, which may affect the country’s economy, exchange rate, etc.

Based on the concept of TP, this mechanism is referred to the prices at which transactions are concluded between the legal entities that are members of one international corporation. This has an impact on selecting the jurisdiction for income taxation [10].

At the same time, transfer prices can be classified into three groups: 1) the ones corresponding to the market prices, 2) the ones that are higher than market prices, and 3) the ones that are lower than market prices (the last two cases will be accepted as the manipulation of transfer prices). Market prices may differ under the impact of two factors – objective (the lack or difficulty in obtaining information about market prices for certain types of goods, works, and services) and subjective (obtaining additional economic benefits, including as a result of “tax planning”). According to the authors, the manipulation of prices in TP can be the difference in the transfer price from the market one for the relevant goods, works, and services arising under the impact of a subjective factor (obtaining economic benefits).