Risk as determinant of income and crossborder pricing of multinational enterprises
AbstractInternational taxation rules for multi- national enterprises (MNEs) prescribe that international prices for goods and services between different subsidiaries â 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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Bibliographic InfoPaper provided by Economics, The University of Manchester in its series The School of Economics Discussion Paper Series with number 1018.
Date of creation: 2010
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Other versions of this item:
- Stefan Lutz & Daniel Kleinfeldt, 2010. "Risk as determinant of income and cross-border pricing of multi-national enterprises," ICER Working Papers 19-2010, ICER - International Centre for Economic Research.
- F2 - International Economics - - International Factor Movements and International Business
- K2 - Law and Economics - - Regulation and Business Law
- L0 - Industrial Organization - - General
- M4 - Business Administration and Business Economics; Marketing; Accounting - - Accounting
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-09-11 (All new papers)
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- Stefan Lutz, 2012. "Risk premia in multi-national enterprises," ICER Working Papers 08-2012, ICER - International Centre for Economic Research.
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