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A negotiation-based model of tax-induced transfer pricing

Listed author(s):
  • Johannes Becker

    ()

    (University of Münster)

  • Ronald B Davies

    ()

    (University College Dublin)

We present a new model of tax-induced transfer pricing as an alternative to the oft-used concealment model. Inspired by interviews with practitioners, we consider a large multinational ?firm which is audited by the tax authority in the high-tax location. When this country adjusts the transfer prices proposed by the fi?rm, the low-tax location may dispute this decision and initiate negotiations. Since negotiations are costly, the high-tax location sets a transfer price that prevents the low-tax location from entering negotiations. We compare this model?'s predictions to those of the concealment model. The negotiation model replicates the predictions on the tax rate effects on transfer pricing, while adding new predictions. Profi?t shifting is expected to fall in the high-tax country?'s bargaining power and to rise in ?firm profi?ts and domestic fi?rm ownership in both countries. Most importantly, profi?t shifting occurs even if tax enforcement is perfect. We analyze the effects of an introduction of a common consolidated corporate tax base with formula apportionment and conclude that the negotiation model may change the perspective on such a policy. Speci?cally, strong countries with large bargaining power may fi?nd this reform unappealing.

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File URL: http://www.sbs.ox.ac.uk/sites/default/files/Business_Taxation/Docs/Publications/Working_Papers/series-14/WP1409.pdf
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Paper provided by Oxford University Centre for Business Taxation in its series Working Papers with number 1409.

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Date of creation: 2014
Handle: RePEc:btx:wpaper:1409
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  5. Bauer, Christian J. & Langenmayr, Dominika, 2013. "Sorting into outsourcing: Are profits taxed at a gorilla's arm's length?," Journal of International Economics, Elsevier, vol. 90(2), pages 326-336.
  6. Clemens Fuest, 2008. "The European Commission's proposal for a common consolidated corporate tax base," Oxford Review of Economic Policy, Oxford University Press, vol. 24(4), pages 720-739, winter.
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  8. 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.
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  17. Thomas Eichner & Marco Runkel, 2008. "Why the European Union Should Adopt Formula Apportionment with a Sales Factor," Scandinavian Journal of Economics, Wiley Blackwell, vol. 110(3), pages 567-589, 09.
  18. Dhammika Dharmapala, 2014. "What Do We Know about Base Erosion and Profit Shifting? A Review of the Empirical Literature," Fiscal Studies, Institute for Fiscal Studies, vol. 35, pages 421-448, December.
  19. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 323-338, November.
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