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International transfer pricing and income shifting: evidence from the UK

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  • P. B. Oyelere
  • C. R. Emmanuel
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    Abstract

    The potential use of international transfer pricing (ITP) as an income-shifting mechanism by multinational enterprises (MNEs) has long been recognized. However, there is relatively little evidence to substantiate or discount this claim in relation to UK-based foreign-controlled enterprises (FCEs). This paper examines the possible use of ITP as an income-shifting mechanism by FCEs operating in the UK. The methodological approach involves the comparison of the profitability (performance) and dividend (post-performance) distributions of a sample of FCEs with those of UK-controlled enterprises (UKCEs) over a two-year period. The two samples are matched on the basis of their total assets (capability). Results reveal significant differences in the profitability and dividend distributions of the two groups. FCEs underperform UKCEs, but their level of dividend distribution outstrips those of UKCEs. Based on this sample of seventy-two companies, a firm is more likely to be an FCE, rather than a UKCE, if it reports a combination of lower performance and higher post-performance distribution. Evidence of significant income shifting by FCEs is confirmed and the claim that ITP is the key mechanism for such shifts cannot be dismissed.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/096381898336222
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal European Accounting Review.

    Volume (Year): 7 (1998)
    Issue (Month): 4 ()
    Pages: 623-635

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    Handle: RePEc:taf:euract:v:7:y:1998:i:4:p:623-635

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    References

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    1. Dietrich, J. Kimball & Sorensen, Eric, 1984. "An application of logit analysis to prediction of merger targets," Journal of Business Research, Elsevier, vol. 12(3), pages 393-402, September.
    2. Peter Buckley & Jane Frecknall Hughes, 1997. "Japanese transfer pricing policy: a note," Applied Economics Letters, Taylor & Francis Journals, vol. 4(1), pages 13-17.
    3. Randall Morck, 2006. "Corporations," Harvard Institute of Economic Research Working Papers 2101, Harvard - Institute of Economic Research.
    4. Grubert, Harry & Mutti, John, 1991. "Taxes, Tariffs and Transfer Pricing in Multinational Corporate Decision Making," The Review of Economics and Statistics, MIT Press, vol. 73(2), pages 285-93, May.
    5. David Harris & Randall Morck & Joel B. Slemrod, 1993. "Income Shifting in U.S. Multinational Corporations," NBER Chapters, in: Studies in International Taxation, pages 277-308 National Bureau of Economic Research, Inc.
    6. repec:fth:michin:287 is not listed on IDEAS
    7. Wi Saeng Kim & Esmeralda O Lyn, 1990. "FDI Theories and the Performance of Foreign Multinationals Operating in the U.S," Journal of International Business Studies, Palgrave Macmillan, vol. 21(1), pages 41-54, March.
    8. Goodspeed, T-J & White, A-D, 1996. "International taxation," Papers 96-11, Wellesley College - Department of Economics.
    9. Harry Grubert & Timothy Goodspeed & Deborah L. Swenson, 1993. "Explaining the Low Taxable Income of Foreign-Controlled Companies in the United States," NBER Chapters, in: Studies in International Taxation, pages 237-276 National Bureau of Economic Research, Inc.
    10. Picciotto, Sol, 1992. "International taxation and intrafirm pricing in transnational corporate groups," Accounting, Organizations and Society, Elsevier, vol. 17(8), pages 759-792, November.
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    Cited by:
    1. Alnoor Bhimani, 2002. "European management accounting research: traditions in the making," European Accounting Review, Taylor & Francis Journals, vol. 11(1), pages 99-117.
    2. Messaoud Mehafdi, 2000. "The Ethics of International Transfer Pricing," Journal of Business Ethics, Springer, vol. 28(4), pages 365-381, December.
    3. Jost, Sven P. & Pfaffermayr, Michael & Winner, Hannes, 2010. "Transfer Pricing as a Tax Compliance Risk," Working Papers in Economics and Finance 2010-6, University of Salzburg.

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