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Transfer Pricing or Formula Apportionment? Tax-Induced Distortions of Multinationals’ Investment and Production Decisions

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Author Info
Jan Thomas Martini ()
Rainer Niemann ()
Dirk Simons ()
Abstract

For mitigating the problems of transfer pricing formula apportionment (FA) is discussed intensively. However, FA could even be more harmful than transfer pricing because income shifting would require changing economic decisions instead of just taking advantage of accounting options. We analyze the impact of different international tax allocation regimes on a corporate group’s investment and production decisions. We show that FA offsets the advantages of decision decentralization as it reverses the separation of responsibilities. It is not clear whether FA is desirable from a fiscal or an entrepreneurial perspective. The effects of FA compared to transfer pricing depend strongly on the parameter setting under consideration, especially the decision procedure within corporate groups.

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Publisher Info
Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 2020.

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Date of creation: 2007
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Handle: RePEc:ces:ceswps:_2020

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Related research
Keywords: capital budgeting; formula apportionment; international taxation; investment incentives; multinational groups; transfer pricing;

Find related papers by JEL classification:
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
M41 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Accounting

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    Other versions:
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