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Can Profit-shifting be Resolved by Penalization?

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  • Tomáš Buus
  • Jaroslav Brada

Abstract

We examine contemporary practice of transfer pricing rules enforcement in this paper. We have used neoclassical microeconomic framework with transfer price estimated via comparable uncontrolled price method. We have found that if vertically integrated multinational enterprise (MNE) has possibility to evade tax through transfer pricing, then it produces higher quantity of final product, than it would if no possibility of tax evasion existed. Secondly we have found that although nowadays' transfer pricing rules require use of enforcement instruments (penalty), there is no penalty high enough to extinguish tax evasive transfer pricing totally, and if market for the product produced in country with high tax rate is perfectly competitive or there is monopolistic competition, no optimal penalty can be found. That changes at oligopolistic, monopolistic or duopolistic market of that product - there we could find optimal penalty.

Suggested Citation

  • Tomáš Buus & Jaroslav Brada, 2010. "Can Profit-shifting be Resolved by Penalization?," European Financial and Accounting Journal, Prague University of Economics and Business, vol. 2010(3), pages 56-74.
    • Handle: RePEc:prg:jnlefa:v:2010:y:2010:i:3:id:55:p:56-74
    DOI: 10.18267/j.efaj.55
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    References listed on IDEAS

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    1. Steven Brakman & Harry Garretsen (ed.), 2008. "Foreign Direct Investment and the Multinational Enterprise," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262026457, December.
    2. Sven Stöwhase, 2005. "Asymmetric Capital Tax Competition with Profit Shifting," Journal of Economics, Springer, vol. 85(2), pages 175-196, August.
    3. AMERIGHI, Oscar, 2004. "Transfer pricing and enforcement policy in oligopolistic markets," LIDAM Discussion Papers CORE 2004069, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    4. Pascalis Raimondos-M¯ller, 2002. "Transfer pricing rules and competing governments," Oxford Economic Papers, Oxford University Press, vol. 54(2), pages 230-246, April.
    5. Jack Hirshleifer, 1956. "On the Economics of Transfer Pricing," The Journal of Business, University of Chicago Press, vol. 29, pages 172-172.
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    More about this item

    Keywords

    Multinational enterprises; Tax evasion; Transfer prices;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D29 - Microeconomics - - Production and Organizations - - - Other
    • G39 - Financial Economics - - Corporate Finance and Governance - - - Other

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