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Risk as Determinant of Income and Cross-border Pricing of Multinational 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 of 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.

Suggested Citation

  • Stefan Lutz & Daniel Kleinfeldt, 2013. "Risk as Determinant of Income and Cross-border Pricing of Multinational Enterprises," Studies in Microeconomics, , vol. 1(2), pages 185-212, December.
  • Handle: RePEc:sae:miceco:v:1:y:2013:i:2:p:185-212
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    References listed on IDEAS

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    1. Hausman, Jerry, 2015. "Specification tests in econometrics," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 38(2), pages 112-134.
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    Cited by:

    1. 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.
    2. Stefan Lutz, 2012. "Effects of taxation on European multi-nationals’ financing and profits," The School of Economics Discussion Paper Series 1214, Economics, The University of Manchester.
    3. Lutz, Stefan, 2013. "Risk premia in multi-national enterprises," The North American Journal of Economics and Finance, Elsevier, vol. 25(C), pages 293-305.

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    More about this item

    Keywords

    MNE; transfer pricing; OECD guidelines; risk; income;
    All these keywords.

    JEL classification:

    • 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; Personnel Economics - - Accounting

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