This article seeks to assess why current transfer pricing rules are the source of tax avoidance and explore some possible remedies. It places transfer pricing rules in the overall context of taxing international business income in the situation of a widely held corporate group operating in several countries. The purpose is (1) to show why transfer pricing is the dominant international issue as compared to corporation and shareholder or residence and source taxation and (2) to lay the policy framework for the analysis of the international tax rules for business income in general and transfer pricing in particular. The theory of the firm developed by Coase provides the policy backdrop for the overall analysis. The article identifies three structural issues in transfer pricing rules as the main drivers of tax planning: (1) current rules defining the tax presence of a corporation in a country are too narrow, (2) current transfer pricing rules permit corporations to structure intra-firm contracts as they wish on an inappropriate market analogy, and (3) the current rules place too much emphasis on risk and not enough on other factors in dividing up international tax revenue. Finally the article suggests solutions (1) by limiting contractual freedom in transactions, (2) by putting more emphasis on other factors to locate profits, and (3) by using a form of profit split for the unallocated balance of profits. The final outcome is similar in approach to the current transfer pricing rules, with the important difference that additional constraints or presumptions are introduced in the transactional framework.