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Risk as determinant of income and cross-border pricing of multi-national enterprises

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  • Stefan Lutz

    ()

  • Daniel Kleinfeldt

Abstract

International taxation rules for multi- national enterprises (MNEs) prescribe that international prices for goods and services between different subsidiaries – and therefore incomes of these subsidiaries - must be comparable to those set between independent international firms for the purpose of taxation. These rules also prescribe that risk should be accounted for in pricing and income. Since current practice of price comparisons does not yet fully allow accounting for risk, prices and in turn earnings and taxation may be distorted. We analyze a panel of about 160,000 European manufacturing, wholesale and retail trade firms for the years 1992 to 2007 in order to establish to what extent earnings do take risk into account. Risk measured by earnings volatility emerges as one major determinant of income. When earnings are set in relation to invested capital, risk emerges as the only stable determinant of income. Results indicate that both MNEs and independent firms regularly account for risk as a major determinant of income when pricing international goods and services.

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File URL: http://www.icer.it/docs/wp2010/ICERwp19-10.pdf
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Bibliographic Info

Paper provided by ICER - International Centre for Economic Research in its series ICER Working Papers with number 19-2010.

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Length: 33 pages
Date of creation: Sep 2010
Date of revision:
Handle: RePEc:icr:wpicer:19-2010

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Keywords: MNE; transfer pricing; OECD guidelines; risk; income;

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  1. Hausman, Jerry A, 1978. "Specification Tests in Econometrics," Econometrica, Econometric Society, vol. 46(6), pages 1251-71, November.
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Cited by:
  1. Lutz, Stefan, 2013. "Risk premia in multi-national enterprises," The North American Journal of Economics and Finance, Elsevier, vol. 25(C), pages 293-305.
  2. Stefan Lutz, 2013. "Effects of taxation on European multi-nationals’ financing and profits," Documentos de Trabajo del ICAE 2013-04, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
  3. Stefan Lutz, 2011. "Simultaneous determination of market value and risk premium in the valuation of firms," ICER Working Papers 15-2011, ICER - International Centre for Economic Research.

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