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On the Properties of Transfer Pricing Rules

Listed author(s):
  • Tomáš Buus
  • Jaroslav Brada

We review some relevant literature in the field of tax evasion avoidance proposals. Unfortunately legislative a political conditions (double taxation treaties, tax competition) prevent some of the most useful designs proposed in the scholar literature, to be widely used in Europe. Then we concentrated on properties of transfer pricing rules proposed by OECD guidelines - Cost+ method, comparable resale price method (CRP), profit split method (PSM), comparable uncontrolled price method. We used neoclassical microeconomic model of firm a simulation tools (random cost a income functions). We found that some of these methods (PSM, CRP with fixed discount) cause quite large distortions in the optimal quantity of final good (a therefore also intermediate product) produced. PSM also falls short on the instability of profitability between related industries in time. The most inconvenient property of Cost+ a CRP, which do not distort quantity produced by MNE if percentage markup (discount) is used, is that they are very sensitive to quality of database revenue authority uses, to stability of prices within industry a to profit margin. VAT or turnover taxes are naturally less sensitive, so emphasis on VAT might be a partial solution of multinationals’ pricing problem.

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Article provided by University of Economics, Prague in its journal Český finanční a účetní časopis.

Volume (Year): 2008 (2008)
Issue (Month): 3 ()
Pages: 39-55

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Handle: RePEc:prg:jnlcfu:v:2008:y:2008:i:3:id:279:p:39-55
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  1. Haufler, Andreas & Schjelderup, Guttorm, 2000. "Corporate Tax Systems and Cross Country Profit Shifting," Oxford Economic Papers, Oxford University Press, vol. 52(2), pages 306-325, April.
  2. 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.
  3. Pascalis Raimondos-M¯ller, 2002. "Transfer pricing rules and competing governments," Oxford Economic Papers, Oxford University Press, vol. 54(2), pages 230-246, April.
  4. Bond, Eric W & Samuelson, Larry, 1989. "Strategic Behaviour and the Rules for International Taxation of Capital," Economic Journal, Royal Economic Society, vol. 99(398), pages 1099-1111, December.
  5. Jack Hirshleifer, 1956. "On the Economics of Transfer Pricing," The Journal of Business, University of Chicago Press, vol. 29, pages 172-172.
  6. Tomáš Buus & Jaroslav BRADA, 2008. "On the Necessity of Using Average Cost as a Base for Transfer Price," European Financial and Accounting Journal, University of Economics, Prague, vol. 2008(3), pages 79-94.
  7. Thomas A. Gresik, 2001. "The Taxing Task of Taxing Transnationals," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 800-838, September.
  8. Lutter, Marcus & Scheffler, Eberhard & Schneider, Uwe, 1998. "Handbuch der Konzernfinanzierung," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 5677, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
  9. Michael Keen & David Wildasin, 2004. "Pareto-Efficient International Taxation," American Economic Review, American Economic Association, vol. 94(1), pages 259-275, March.
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