Strategic Trade Policy through the Tax System
AbstractIf conventional instruments of strategic trade policy are unavailable, the system of foreign profit taxation and transfer price guidelines may serve as surrogate policy instruments. In this paper, I consider a model where firms from two countries compete with each other on a third market. I analyze optimal policy choices of the firms’ residence countries aiming at strategically manipulating the competitivity of their firms on the third market. I show that, as has recently been claimed, countries prefer the tax exemption system over the tax credit system if transfer prices for headquarter services to the affiliate are close to the headquarter’s variable cost and if the third country’s tax rate is low (i.e., if there is a large tax differential between both locations within the firm). However, if transfer prices are high and the tax rate in the third market country is sufficiently close to the residence country’s tax rate, I show that the tax credit system is an optimal tax policy choice for both countries. From a policy perspective, the view that the tax exemption system is generally the best policy response if domestic firms’ competitiveness is a policy goal has to be qualified.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3066.
Date of creation: 2010
Date of revision:
corporate taxation; repatriation tax; transfer pricing;
Find related papers by JEL classification:
- F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
- H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- James A. Brander & Barbara J. Spencer, 1984.
"Export Subsidies and International Market Share Rivalry,"
NBER Working Papers
1464, National Bureau of Economic Research, Inc.
- Brander, James A. & Spencer, Barbara J., 1985. "Export subsidies and international market share rivalry," Journal of International Economics, Elsevier, vol. 18(1-2), pages 83-100, February.
- Bond, Eric W & Samuelson, Larry, 1989.
"Strategic Behaviour and the Rules for International Taxation of Capital,"
Royal Economic Society, vol. 99(398), pages 1099-1111, December.
- Bond, E.W. & Samuelson, L., 1988. "Strategic Behavior And The Rules For International Taxation Of Capital," Papers 3-88-10, Pennsylvania State - Department of Economics.
- Johannes Becker, 2009.
"Taxation of Foreign Profits with Heterogeneous Multinational Firms,"
CESifo Working Paper Series
2899, CESifo Group Munich.
- Johannes Becker, 2013. "Taxation of Foreign Profits with Heterogeneous Multinational Firms," The World Economy, Wiley Blackwell, vol. 36(1), pages 76-92, 01.
- Overesch, Michael, 2006. "Transfer pricing of intrafirm sales as a profit shifting channel: evidence from German firm data," ZEW Discussion Papers 06-84, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
- Joel Slemrod, 1998.
"A General Model of the Behavioral Response to Taxation,"
NBER Working Papers
6582, National Bureau of Economic Research, Inc.
- Joel Slemrod, 2001. "A General Model of the Behavioral Response to Taxation," International Tax and Public Finance, Springer, vol. 8(2), pages 119-128, March.
- Michael P. Devereux, 2008.
"Taxation of outbound direct investment: economic principles and tax policy considerations,"
Oxford Review of Economic Policy,
Oxford University Press, vol. 24(4), pages 698-719, winter.
- Michael P Devereux, 2008. "Taxation of Outbound Direct Investment: Economic Principles and Tax Policy Considerations," Working Papers 0824, Oxford University Centre for Business Taxation.
- Mintz, J. & Tulkens, H., .
"Optimality properties of alternative systems of taxation of foreign capital income,"
CORE Discussion Papers RP
-1212, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Mintz, Jack & Tulkens, Henry, 1996. "Optimality properties of alternative systems of taxation of foreign capital income," Journal of Public Economics, Elsevier, vol. 60(3), pages 373-399, June.
- MINTZ, Jacques & TULKENS , Henry, 1994. "Optimality Properties of Alternative Systems of Taxation of Foreign Capital Income," CORE Discussion Papers 1994078, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Clausing, Kimberly A., 2003. "Tax-motivated transfer pricing and US intrafirm trade prices," Journal of Public Economics, Elsevier, vol. 87(9-10), pages 2207-2223, September.
- Harry Grubert & Joel Slemrod, 1998.
"The Effect Of Taxes On Investment And Income Shifting To Puerto Rico,"
The Review of Economics and Statistics,
MIT Press, vol. 80(3), pages 365-373, August.
- Harry Grubert & Joel Slemrod, 1994. "The Effect of Taxes on Investment and Income Shifting to Puerto Rico," NBER Working Papers 4869, National Bureau of Economic Research, Inc.
- Desai, Mihir A. & Hines, James R. Jr., 2004. "Old Rules and New Realities: Corporate Tax Policy in a Global Setting," National Tax Journal, National Tax Association, vol. 57(4), pages 937-60, December.
- Johannes Becker & Clemens Fuest, 2010.
"Taxing Foreign Profits With International Mergers And Acquisitions,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(1), pages 171-186, 02.
- Johannes Becker & Clemens Fuest, 2007. "Taxing Foreign Profits with International Mergers and Acquisitions," Working Papers 0719, Oxford University Centre for Business Taxation.
- Gene M. Grossman & Esteban Rossi-Hansberg, 2008.
"Trading Tasks: A Simple Theory of Offshoring,"
American Economic Review,
American Economic Association, vol. 98(5), pages 1978-97, December.
- Becker, Johannes & Fuest, Clemens, 2012.
"Transfer pricing policy and the intensity of tax rate competition,"
Elsevier, vol. 117(1), pages 146-148.
- Johannes Becker & Clemens Fuest, 2009. "Transfer Pricing Policy and the Intensity of Tax Rate Competition," Working Papers 0930, Oxford University Centre for Business Taxation.
- Huizinga, Harry & Laeven, Luc, 2007. "International Profit Shifting within European Multinationals," CEPR Discussion Papers 6048, C.E.P.R. Discussion Papers.
- Andrew B. Bernard & J. Bradford Jensen & Peter K. Schott, 2006.
"Transfer Pricing by U.S.-Based Multinational Firms,"
NBER Working Papers
12493, National Bureau of Economic Research, Inc.
- Andrew Bernard & J. Bradford Jensen & Peter Schott, 2008. "Transfer Pricing by U.S.-Based Multinational Firms," Working Papers 08-29, Center for Economic Studies, U.S. Census Bureau.
- Michael P Devereux, 2007. "The Impact of Taxation on the Location of Capital, Firms and Profit: a Survey of Empirical Evidence," Working Papers 0702, Oxford University Centre for Business Taxation.
- Elitzur, Ramy & Mintz, Jack, 1996. "Transfer pricing rules and corporate tax competition," Journal of Public Economics, Elsevier, vol. 60(3), pages 401-422, June.
- Holmstrom, Bengt & Tirole, Jean, 1991. "Transfer Pricing and Organizational Form," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(2), pages 201-28, Fall.
- Ronald B. Davies, 2010.
"The Silver Lining of Red Tape,"
The Institute for International Integration Studies Discussion Paper Series
- Johannes Becker & Clemens Fuest, 2011.
"The taxation of foreign profits - the old view, the new view and a pragmatic view,"
1104, Oxford University Centre for Business Taxation.
- Johannes Becker & Clemens Fuest, 2011. "The taxation of foreign profits — The old view, the new view and a pragmatic view," Intereconomics: Review of European Economic Policy, Springer, vol. 46(2), pages 92-97, March.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Julio Saavedra).
If references are entirely missing, you can add them using this form.