Advanced Search
MyIDEAS: Login to save this paper or follow this series

Sorting into Outsourcing: Are Profits Taxed at a Gorilla's Arm's Length?

Contents:

Author Info

  • Christian Josef Bauer
  • Dominika Langenmayr

Abstract

This article analyzes profit taxation according to the arm’s length principle in a model where heterogeneous firms sort into foreign outsourcing. We show that multinational firms are able to shift profits abroad even if they fully comply with the tax code. This is because, in equilibrium, intra-firm transactions occur in firms that are better than the market at input production. Moreover, market input prices include a mark-up that arises from the bargaining between the firm and the independent supplier. Transfer prices set at market values following the arm’s length principle thus systematically exceed multinationals’ marginal costs, leading to a reduction of tax payments for each unit sold. The optimal organization of firms hence provides a new rationale for the empirically observed lower tax burden of multinational corporations.

Download Info

If 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.
File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2012/wp-cesifo-2012-10/cesifo1_wp3967.pdf
Download Restriction: no

Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3967.

as in new window
Length:
Date of creation: 2012
Date of revision:
Handle: RePEc:ces:ceswps:_3967

Contact details of provider:
Postal: Poschingerstrasse 5, 81679 Munich
Phone: +49 (89) 9224-0
Fax: +49 (89) 985369
Email:
Web page: http://www.cesifo.de
More information through EDIRC

Related research

Keywords: outsourcing; profit taxation; transfer pricing; arm’s length principle; multinational firms;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
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.:
as in new window
  1. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  2. Pol Antràs, 2003. "Firms, Contracts, and Trade Structure," NBER Working Papers 9740, National Bureau of Economic Research, Inc.
  3. Thiess Buettner & Michael Overesch & Ulrich Schreiber & Georg Wamser, 2006. "Taxation and Capital Structure Choice – Evidence from a Panel of German Multinationals," CESifo Working Paper Series 1841, CESifo Group Munich.
  4. Bauer, Christian J. & Langenmayr, Dominika, 2013. "Sorting into outsourcing: Are profits taxed at a gorilla's arm's length?," Journal of International Economics, Elsevier, Elsevier, vol. 90(2), pages 326-336.
  5. Clausing, Kimberly A., 2003. "Tax-motivated transfer pricing and US intrafirm trade prices," Journal of Public Economics, Elsevier, Elsevier, vol. 87(9-10), pages 2207-2223, September.
  6. Bartelsman, Eric J & Beetsma, Roel, 2000. "Why Pay More? Corporate Tax Avoidance Through Transfer Pricing in OECD Countries," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2543, C.E.P.R. Discussion Papers.
  7. Haufler, Andreas & Schjelderup, Guttorm, 2000. "Corporate Tax Systems and Cross Country Profit Shifting," Oxford Economic Papers, Oxford University Press, vol. 52(2), pages 306-25, April.
  8. Fujita, Masahisa & Thisse, Jacques-Francois, 2004. "Globalization and the Evolution of the Supply Chain: who gains and who loses?," IDE Discussion Papers, Institute of Developing Economies, Japan External Trade Organization(JETRO) 5, Institute of Developing Economies, Japan External Trade Organization(JETRO).
  9. Gumpert, Anna & Hines, James R. & Schnitzer, Monika, 2011. "The use of tax havens in exemption regimes," Discussion Paper Series 1: Economic Studies 2011,30, Deutsche Bundesbank, Research Centre.
  10. Gene M. Grossman & Elhanan Helpman & Adam Szeidl, 2003. "Optimal Integration Strategies for the Multinational Firm," NBER Working Papers 10189, National Bureau of Economic Research, Inc.
  11. Voget, Johannes, 2011. "Relocation of headquarters and international taxation," Journal of Public Economics, Elsevier, Elsevier, vol. 95(9-10), pages 1067-1081, October.
  12. Egger, Peter & Seidel, Tobias, 2013. "Corporate taxes and intra-firm trade," European Economic Review, Elsevier, Elsevier, vol. 63(C), pages 225-242.
  13. Matthew T Cole & Ronald B Davies, 2009. "Optimal Tariffs, Tariff Jumping, and Heterogeneous Firms," Working Papers, School Of Economics, University College Dublin 200919, School Of Economics, University College Dublin.
  14. Davin Chor, 2007. "Subsides for FDI : Implications from a Model with Heterogeneous Firms," Finance Working Papers 22069, East Asian Bureau of Economic Research.
  15. Egger, Peter & Eggert, Wolfgang & Keuschnigg, Christian & Winner, Hannes, 2010. "Corporate taxation, debt financing and foreign-plant ownership," European Economic Review, Elsevier, Elsevier, vol. 54(1), pages 96-107, January.
  16. Tomiura, Eiichi, 2007. "Foreign outsourcing, exporting, and FDI: A productivity comparison at the firm level," Journal of International Economics, Elsevier, Elsevier, vol. 72(1), pages 113-127, May.
  17. Huizinga, Harry & Laeven, Luc, 2008. "International profit shifting within multinationals: A multi-country perspective," Journal of Public Economics, Elsevier, Elsevier, vol. 92(5-6), pages 1164-1182, June.
  18. Richard Baldwin & Toshihiro Okubo, 2009. "Tax Reform, Delocation, and Heterogeneous Firms," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 111(4), pages 741-764, December.
  19. Head, Keith & Ries, John, 2003. "Heterogeneity and the FDI versus export decision of Japanese manufacturers," Journal of the Japanese and International Economies, Elsevier, vol. 17(4), pages 448-467, December.
  20. Gene M. Grossman & Elhanan Helpman, 2002. "Outsourcing in a Global Economy?," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1966, Harvard - Institute of Economic Research.
  21. Dischinger, Matthias & Riedel, Nadine, 2011. "Corporate taxes and the location of intangible assets within multinational firms," Journal of Public Economics, Elsevier, Elsevier, vol. 95(7-8), pages 691-707, August.
  22. Egger, Peter & Eggert, Wolfgang & Winner, Hannes, 2010. "Saving taxes through foreign plant ownership," Journal of International Economics, Elsevier, Elsevier, vol. 81(1), pages 99-108, May.
  23. Michael Devereux & Simon Loretz, 2012. "What do we know about corporate tax competition?," Working Papers, Oxford University Centre for Business Taxation 1229, Oxford University Centre for Business Taxation.
  24. Sebastian Krautheim & Tim Schmidt-Eisenlohr, 2009. "Heterogeneous Firms, "Profit Shifting" FDI and International Tax Competition," Documents de travail du Centre d'Economie de la Sorbonne, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne 09073, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  25. Barbara Spencer, 2005. "International outsourcing and incomplete contracts," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 38(4), pages 1107-1135, November.
  26. Pol Antras & Elhanan Helpman, 2004. "Global Sourcing," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 112(3), pages 552-580, June.
  27. Guttorm Schjelderup & Alfons J. Weichenrieder, 1999. "Trade, Multinationals, and Transfer Pricing Regulations," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 32(3), pages 817-844, May.
  28. Desai, Mihir A. & Foley, C. Fritz & Hines, James Jr., 2006. "The demand for tax haven operations," Journal of Public Economics, Elsevier, Elsevier, vol. 90(3), pages 513-531, February.
  29. 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.
  30. repec:hrv:faseco:4784029 is not listed on IDEAS
  31. Oliver Hart & Sanford Grossman, 1985. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 372, Massachusetts Institute of Technology (MIT), Department of Economics.
  32. Janeba, Eckhard, 1996. "Foreign direct investment under oligopoly: Profit shifting or profit capturing?," Journal of Public Economics, Elsevier, Elsevier, vol. 60(3), pages 423-445, June.
  33. Simon Loretz & Padraig J. Moore, 2009. "Corporate tax competition between firms," Working Papers 2009/19, Institut d'Economia de Barcelona (IEB).
  34. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, Econometric Society, vol. 71(6), pages 1695-1725, November.
  35. Gene M. Grossman & Elhanan Helpman, 2002. "Integration Versus Outsourcing In Industry Equilibrium," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(1), pages 85-120, February.
  36. Yeaple, Stephen & Helpman, Elhanan & Melitz, Marc, 2004. "Export versus FDI with Heterogeneous Firms," Scholarly Articles 3229098, Harvard University Department of Economics.
  37. Voget, Johannes, 2011. "Relocation of headquarters and international taxation," Journal of Public Economics, Elsevier, Elsevier, vol. 95(9), pages 1067-1081.
  38. Kenji Matsui, 2012. "Auditing internal transfer prices in multinationals under monopolistic competition," International Tax and Public Finance, Springer, Springer, vol. 19(6), pages 800-818, December.
  39. Oliver Lorz & Matthias Wrede, 2008. "Standardization of intermediate goods and international trade," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 41(2), pages 517-536, May.
  40. Thomas Gresik & Petter Osmundsen, 2008. "Transfer pricing in vertically integrated industries," International Tax and Public Finance, Springer, Springer, vol. 15(3), pages 231-255, June.
  41. Elitzur, Ramy & Mintz, Jack, 1996. "Transfer pricing rules and corporate tax competition," Journal of Public Economics, Elsevier, Elsevier, vol. 60(3), pages 401-422, June.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Johannes Becker & Ronald B. Davies, 2014. "A Negotiation-Based Model of Tax-Induced Transfer Pricing," The Institute for International Integration Studies Discussion Paper Series, IIIS iiisdp451, IIIS.
  2. Bauer, Christian J. & Langenmayr, Dominika, 2013. "Sorting into outsourcing: Are profits taxed at a gorilla's arm's length?," Journal of International Economics, Elsevier, Elsevier, vol. 90(2), pages 326-336.
  3. Dominika Langenmayr & Andreas Hau fler & Christian J. Bauer, 2013. "Should tax policy favour high or low productivity firms?," Working Papers, Oxford University Centre for Business Taxation 1308, Oxford University Centre for Business Taxation.
  4. Thomas Gresik, 2013. "Allowing Firms to Choose Between Formula Apportionment and Separate Accounting Taxation," CESifo Working Paper Series 4560, CESifo Group Munich.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_3967. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Julio Saavedra).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.