The Fiscal Blind Spot of Consolidated Reporting: Transfer Pricing, Informational Gaps and the Emerging OECD Transparency Framework

Multinational Enterprise Groups are required under IFRS 10 to present consolidated financial statements that represent the group as a single economic entity, eliminating the intragroup transactions priced through transfer pricing arrangements that determine how taxable income is actually allocated among its constituent entities. Since current taxes are assessed and paid at the entity level before consolidation intervenes, and the tax reconciliation required under IAS 12 discloses these fiscal effects only in aggregated form, a systematic informational gap arises between the group-level representation of consolidated accounts and the entity-level reality of transfer pricing. This thesis examines how transfer pricing policies distort the fiscal representation of multinational groups in consolidated financial statements, and whether the OECD's transparency frameworks, the Base Erosion and Profit Shifting project, Country-by-Country Reporting, and the Pillar Two GloBE Rules, provide an effective response to this structural limitation. The analysis proceeds normatively, examining the consolidation and tax reconciliation mechanisms, the arm's length principle and its application to goods, services, and intangibles, and the design and current limitations of each transparency instrument, before applying this framework to a stylised simulation of a multinational group calibrated on real-world statutory tax rates and arm's length royalty rates. The simulation traces a transfer pricing arrangement involving both an intragroup sale of goods and an intragroup royalty through the consolidated financial statements, the Country-by-Country Report, and the GloBE computation, and tests, through a sensitivity analysis, whether the resulting pattern is robust to the intensity of the underlying arrangement. A further set of indicators, built exclusively from mandatory public disclosures, assesses how far an external reader without access to confidential information can detect the presence of such an arrangement. The analysis finds that none of the transparency instruments considered, individually or combined, closes the informational gap it is designed to address; each narrows it along a different dimension while leaving the separate-entity logic of international taxation and the group-level logic of consolidated reporting as distinct as before their introduction, so that an external reader can, at most, identify where a transfer pricing arrangement might be worth investigating, not establish that one exists.