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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
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    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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    Bibliographic Info

    Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2020.

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

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    Related research

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

    References

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    Cited by:
    1. Bas, Maria & Ledezma, Ivan, 2007. "Market Access and the Evolution of within Plant Productivity in Chile," Economics Papers from University Paris Dauphine 123456789/6913, Paris Dauphine University.
    2. Sommer, Christoph, 2008. "Theorie der Besteuerung nach Formula Apportionment − Untersuchung auftretender ökonomischer Effekte anhand eines Allgemeinen Gleichgewichtsmodells," arqus Discussion Papers in Quantitative Tax Research 46, arqus - Arbeitskreis Quantitative Steuerlehre.

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