Transfer Pricing through the prism of Behavioral Economics

The issues of tax enforcement and avoidance are one of the most important agendas of the world governance. It involves economic, legal and enforcement considerations which have been studied extensively so far. However, the dynamics of human discretion involved in tax compliance and tax enforcement as the fourth dimension, is generally understated in the tax policy formulation. Such a study becomes even more relevant in a developing country such as India, having a complex blend of governance predicaments. This complexity is further deepened when issues in international trade between associated enterprises are under consideration. This paper attempts to study and theorize the application of human discretion in tax compliance from a behavioral perspective. It attempts to suggest an alternative pragmatic model to derive a solution to the problem of tax evasion or tax avoidance with a specific context of Transfer Pricing.