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The economics of advance pricing agreements

Listed author(s):
  • Becker, Johannes
  • Davies, Ronald B.
  • Jakobs, Gitte

Advance pricing agreements (APAs) determine transfer prices for intra-firm transactions in advance of tax filing. This paper presents a model in which these contracts serve to overcome a hold-up problem that occurs because governments cannot commit to non-excessive future tax rates. We find that implemented APAs lead to a Pareto improvement even when all agents are risk neutral. Multilateral APAs are, in general, more efficient than unilateral ones. However, not all efficient APAs are concluded in equilibrium, due to asymmetric information problems. For the same reason, equilibrium APAs are highly complex, just as in practice. Surprisingly, APAs may lead to an increase in profit shifting to the low tax location and, in most cases, do not allow for a reduction in audit capacity.

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File URL: http://www.sciencedirect.com/science/article/pii/S0167268116303018
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Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 134 (2017)
Issue (Month): C ()
Pages: 255-268

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Handle: RePEc:eee:jeborg:v:134:y:2017:i:c:p:255-268
DOI: 10.1016/j.jebo.2016.12.019
Contact details of provider: Web page: http://www.elsevier.com/locate/jebo

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  1. Theresa Lohse & Nadine Riedel, 2013. "Do Transfer Pricing Laws Limit International Income Shifting? Evidence from European Multinationals," CESifo Working Paper Series 4404, CESifo Group Munich.
  2. Ronald B. Davies & Julien Martin & Mathieu Parenti & Farid Toubal, 2014. "Knocking on Tax Haven's Door: Multinational Firms and Transfer Pricing," CESifo Working Paper Series 5132, CESifo Group Munich.
  3. Jonathan Thomas & Tim Worrall, 1994. "Foreign Direct Investment and the Risk of Expropriation," Review of Economic Studies, Oxford University Press, vol. 61(1), pages 81-108.
  4. Johannes Becker & Ronald B. Davies, 2014. "A Negotiation-Based Model of Tax-Induced Transfer Pricing," CESifo Working Paper Series 4892, CESifo Group Munich.
  5. Baron, David P & Myerson, Roger B, 1982. "Regulating a Monopolist with Unknown Costs," Econometrica, Econometric Society, vol. 50(4), pages 911-930, July.
  6. Bartelsman, Eric J. & Beetsma, Roel M. W. J., 2003. "Why pay more? Corporate tax avoidance through transfer pricing in OECD countries," Journal of Public Economics, Elsevier, vol. 87(9-10), pages 2225-2252, September.
  7. Kimberly A. Clausing, 2000. "The Impact of Transfer Pricing on Intrafirm Trade," NBER Chapters,in: International Taxation and Multinational Activity, pages 173-200 National Bureau of Economic Research, Inc.
  8. 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.
  9. Sebastian Kessing & Kai Konrad & Christos Kotsogiannis, 2009. "Federalism, weak institutions and the competition for foreign direct investment," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 16(1), pages 105-123, February.
  10. Rainer Lanz & Sébastien Miroudot, 2011. "Intra-Firm Trade: Patterns, Determinants and Policy Implications," OECD Trade Policy Papers 114, OECD Publishing.
  11. Tomohara, Akinori, 2004. "Inefficiencies of Bilateral Advanced Pricing Agreements (BAPA) in Taxing Multinational Companies," National Tax Journal, National Tax Association, vol. 57(4), pages 863-873, December.
  12. De Waegenaere, Anja & Sansing, Richard & Wielhouwer, Jacco L., 2007. "Using Bilateral Advance Pricing Agreements to Resolve Tax Transfer Pricing Disputes," National Tax Journal, National Tax Association, vol. 60(2), pages 173-191, June.
  13. Diller, Markus & Vollert, Pia, 2011. "Economic analysis of advance tax rulings," arqus Discussion Papers in Quantitative Tax Research 122, arqus - Arbeitskreis Quantitative Steuerlehre.
  14. Michael J. Keen & Christos Kotsogiannis, 2002. "Does Federalism Lead to Excessively High Taxes?," American Economic Review, American Economic Association, vol. 92(1), pages 363-370, March.
  15. Eaton, Jonathan & Gersovitz, Mark, 1984. "A Theory of Expropriation and Deviations from Perfect Capital Mobility," Economic Journal, Royal Economic Society, vol. 94(373), pages 16-40, March.
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