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Tax havens and cross-border licensing with transfer pricing regulation

Author

Listed:
  • Jay Pil Choi

    (Michigan State University
    Yonsei University)

  • Jota Ishikawa

    (Gakushuin University
    Research Institute of Economy, Trade and Industry
    Hitotsubashi University)

  • Hirofumi Okoshi

    (Okayama University)

Abstract

Multinational enterprises (MNEs) have incentive to reduce tax payment through transfer pricing. The incentive is stronger when MNEs own intangibles, because it is easy to transfer them across countries. To mitigate such strategic tax planning, the OECD proposes the arm’s length principle (ALP). This paper deals with technology patents as an example of intangibles and investigates how the ALP affects MNEs’ licensing strategies and welfare in a model with a tax haven. The ALP may distort MNEs’ licensing decisions, because providing a license to unrelated firms restricts MNEs’ profit-shifting opportunities due to the emergence of comparable transaction. Interestingly, the termination of licensing in the presence of the ALP may worsen domestic welfare if the (potential) licensee and the MNE’s subsidiary do not compete in the domestic market but may improve welfare if they compete. The results under ad valorem royalty are in distinct contrast with those under per-unit royalty.

Suggested Citation

  • Jay Pil Choi & Jota Ishikawa & Hirofumi Okoshi, 2024. "Tax havens and cross-border licensing with transfer pricing regulation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 31(2), pages 333-366, April.
    • Handle: RePEc:kap:itaxpf:v:31:y:2024:i:2:d:10.1007_s10797-022-09770-w
    DOI: 10.1007/s10797-022-09770-w
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    More about this item

    Keywords

    Multinational enterprises; Intangibles; Licensing; Transfer pricing; Arm’s length principle;
    All these keywords.

    JEL classification:

    • D45 - Microeconomics - - Market Structure, Pricing, and Design - - - Rationing; Licensing
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies

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