Multinational Firms' Heterogeneity in Tax Responsiveness: The Role of Transfer Pricing
AbstractAbstract In this paper we show that the ability of multinational firms to manipulate transfer prices affects the tax sensitivity of foreign direct investment (FDI). We offer a model of international capital allocation where firms are heterogeneous in their ability to manipulate transfer prices. Perhaps paradoxically, we show that the ability to shift profits can make parent companies' investment more sensitive to host-country tax rates, as long as investors expect fiscal authorities to use price and profit detection methods. We then offer a comprehensive empirical study to test our predictions in the case of Japanese FDI. We exploit the finding that the unobservable ability to manipulate transfer prices is correlated with whole ownership of affiliates and R&D expenditure. Based on country, parent firm and sector characteristics, we estimate an investment equation on a sample of 3,614 Japanese affiliates in 49 emerging countries. We obtain a greater semi-elasticity of investment to the statutory tax rate in affiliates that are wholly-owned and that have R&D-intensive parents. We interpret these results as indirect evidence that abusive transfer pricing is one of the determinants of FDI activity. Copyright 2009 The Authors. Journal compilation 2009 Blackwell Publishing Ltd.
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Bibliographic InfoArticle provided by Wiley Blackwell in its journal World Economy.
Volume (Year): 32 (2009)
Issue (Month): 9 (09)
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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0378-5920
Other versions of this item:
- Céline Azémar & Paolo Gregory Corcos, . "Multinational Firms' Heterogeneity in Tax Responsiveness: the Role of Transfer Pricing," Working Papers 2008_04, Business School - Economics, University of Glasgow, revised Feb 2008.
- F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
- H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
- H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
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