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A Negotiation-Based Model of Tax-Induced Transfer Pricing

Author

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  • Johannes Becker
  • Ronald B. Davies

Abstract

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 firm, 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. Profit shifting is expected to fall in the high-tax country’s bargaining power and to rise in firm profits and domestic firm ownership in both countries. Most importantly, profit 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. Specifically, strong countries with large bargaining power may find this reform unappealing.

Suggested Citation

  • Johannes Becker & Ronald B. Davies, 2014. "A Negotiation-Based Model of Tax-Induced Transfer Pricing," CESifo Working Paper Series 4892, CESifo.
  • Handle: RePEc:ces:ceswps:_4892
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    Cited by:

    1. Johannes Becker & Ronald B. Davies, 2015. "Negotiated Transfer Prices," Working Papers 201527, School of Economics, University College Dublin.
    2. Petra Doleželová, 2020. "Impact Of Unilateral Preferences On Export Structure Of The Least Developed Countries," Medzinarodne vztahy (Journal of International Relations), Ekonomická univerzita, Fakulta medzinárodných vzťahov, vol. 18(1), pages 57-70.
    3. Ronald B. Davies & Julien Martin & Mathieu Parenti & Farid Toubal, 2018. "Knocking on Tax Haven’s Door: Multinational Firms and Transfer Pricing," The Review of Economics and Statistics, MIT Press, vol. 100(1), pages 120-134, March.
    4. František Škvrnda, 2020. "On Contradictory Of Multipolarity Creation Process In The International Relations In The 21st Century," Medzinarodne vztahy (Journal of International Relations), Ekonomická univerzita, Fakulta medzinárodných vzťahov, vol. 18(1), pages 36-56.
    5. Katarzyna Bilicka & André Seidel, 2020. "Profit shifting and corruption," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(5), pages 1051-1080, October.
    6. Wier, Ludvig, 2020. "Tax-motivated transfer mispricing in South Africa: Direct evidence using transaction data," Journal of Public Economics, Elsevier, vol. 184(C).
    7. Becker, Johannes & Davies, Ronald B. & Jakobs, Gitte, 2017. "The economics of advance pricing agreements," Journal of Economic Behavior & Organization, Elsevier, vol. 134(C), pages 255-268.
    8. Rathke, Alex Augusto Timm & Rezende, Amaury José, 2016. "Exploring the characteristics of transfer pricing systems across countries," EconStor Preprints 130141, ZBW - Leibniz Information Centre for Economics.
    9. Søren Bo Nielsen & Dirk Schindler & Guttorm Schjelderup, 2014. "Abusive Transfer Pricing and Economic Activity," CESifo Working Paper Series 4975, CESifo.
    10. Holzmann, Carolin Maria, 2016. "Transfer pricing as tax avoidance under different legislative schemes," VfS Annual Conference 2016 (Augsburg): Demographic Change 145929, Verein für Socialpolitik / German Economic Association.
    11. Rathke, Alex Augusto Timm & Rezende, Amaury José, 2016. "Exploring the characteristics of transfer pricing systems across countries," MPRA Paper 70437, University Library of Munich, Germany.
    12. Diller, Markus & Lorenz, Johannes, 2017. "Do tax information exchange agreements curb transfer pricing-induced tax avoidance?," Passauer Diskussionspapiere, Betriebswirtschaftliche Reihe B-29-17, University of Passau, Faculty of Business and Economics.
    13. Andrea Lassmann & Benedikt Marian Maximilian Zoller-Rydzek, 2019. "Decomposing the Margins of Transfer Pricing," KOF Working papers 19-450, KOF Swiss Economic Institute, ETH Zurich.
    14. Mariia Ermilova, 2020. "International Experience Of Regulation Of Controlled Transactions Of Transnational Companies," Medzinarodne vztahy (Journal of International Relations), Ekonomická univerzita, Fakulta medzinárodných vzťahov, vol. 18(1), pages 71-88.
    15. Tetiana Kaminska & Ihor Okhrimenko & Natalia Wasilewska, 2020. "Method For Implementing The Macroeconomic Analysis Of The Agricultural Market Of The European Union," Medzinarodne vztahy (Journal of International Relations), Ekonomická univerzita, Fakulta medzinárodných vzťahov, vol. 18(1), pages 5-20.
    16. Marcel Kordoš, 2020. "The Synergy Of Eu Competition And Industry Policies Within The Industry 4.0 Concept: Parallels And Challenges," Medzinarodne vztahy (Journal of International Relations), Ekonomická univerzita, Fakulta medzinárodných vzťahov, vol. 18(1), pages 21-35.

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    More about this item

    Keywords

    transfer pricing; Nash bargaining; tax avoidance; corporate taxation;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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