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Knocking on Tax Haven's Door: Multinational Firms and Transfer Pricing

Author

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  • Ronald B. Davies
  • Julien Martin
  • Mathieu Parent
  • Farid Toubal

Abstract

This paper analyzes the transfer pricing of multinational firms. We propose a simple framework in which intra-firm prices may systematically deviate from arm's length prices for two motives: i) pricing to market, and ii) tax avoidance. Multinational firms may decide not to avoid taxes if the risk to be sanctioned is high compared to the tax gap. Using detailed French firm-level data on arm's length and intra-firm export prices, we find that both mechanisms are at work. The sensitivity of intra-firm prices to foreign taxes is reinforced once we control for pricing-to-market determinants. Most importantly, we find almost no evidence of tax avoidance if we disregard exports to tax havens. Back-of-theenvelope calculations suggest that tax avoidance through transfer pricing amounts to about 1% of the total corporate taxes collected by tax authorities in France. The lion's share of this loss is driven by the exports of 450 firms to ten tax havens. As such, it may be possible to achieve significant revenue increases with minimal cost by targeting enforcement.

Suggested Citation

  • Ronald B. Davies & Julien Martin & Mathieu Parent & Farid Toubal, 2014. "Knocking on Tax Haven's Door: Multinational Firms and Transfer Pricing," Working Papers 2014-21, CEPII research center.
  • Handle: RePEc:cii:cepidt:2014-21
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    References listed on IDEAS

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    Cited by:

    1. Arnt Ove Hopland & Petro Lisowsky & Mohammed Mardan & Dirk Schindler, 2014. "Income Shifting under Losses," CESifo Working Paper Series 5130, CESifo Group Munich.
    2. Johannes Becker & Ronald B. Davies, 2015. "Negotiated Transfer Prices," Working Papers 201527, School of Economics, University College Dublin.
    3. Philippe Askenazy & Christine Erhel, 2016. "The French productivity puzzle," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01300987, HAL.
    4. V. Vicard, 2015. "Profit shifting through transfer pricing: evidence from French firm level trade data," Working papers 555, Banque de France.
    5. 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.
    6. Overesch Michael, 2016. "Steuervermeidung multinationaler Unternehmen," Perspektiven der Wirtschaftspolitik, De Gruyter, vol. 17(2), pages 129-143, July.
    7. Dudar, Olena & Spengel, Christoph & Voget, Johannes, 2015. "The impact of taxes on bilateral royalty flows," ZEW Discussion Papers 15-052, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    8. Askenazy, Philippe & Erhel, Christine, 2015. "The French Productivity Puzzle," IZA Discussion Papers 9188, Institute for the Study of Labor (IZA).
    9. Johannes Becker & Ronald B. Davies, 2014. "A Negotiation-Based Model of Tax-Induced Transfer Pricing," The Institute for International Integration Studies Discussion Paper Series iiisdp451, IIIS.
    10. Petr Jansky & Miroslav Palansky, 2017. "Estimating the Scale of Profit Shifting and Tax Revenue Losses Related to Foreign Direct Investment," Working Papers IES 2017/25, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Nov 2017.
    11. Nicolay, Katharina & Nusser, Hannah & Pfeiffer, Olena, 2017. "On the interdependency of profit shifting channels and the effectiveness of anti-avoidance legislation," ZEW Discussion Papers 17-066, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    12. Peter Egger & Michael Stimmelmayr, 2017. "Taxation and the Multinational Firm," CESifo Working Paper Series 6384, CESifo Group Munich.
    13. Irlacher, Michael & Unger, Florian, 2018. "Effective tax rates, endogenous mark-ups and heterogeneous firms," Discussion Papers in Economics 49717, University of Munich, Department of Economics.
    14. repec:ces:ifodic:v:12:y:2015:i:4:p:19149986 is not listed on IDEAS
    15. Hayato Kato & Hirofumi Okoshi, 2017. "Production Location of Multinational Firms under Transfer Pricing: The Impact of the Arm's Length Principle," Keio-IES Discussion Paper Series 2017-016, Institute for Economics Studies, Keio University.
    16. Bodo Knoll & Nadine Riedel, 2015. "Transfer Pricing Laws," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 12(4), pages 22-26, 01.
    17. 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.
    18. Wolfgang Eggert & Gideon Goerdt & Sebastian Felix Heitzmann, 2018. "Transfer Pricing and Partial Tax Harmonization," CESifo Working Paper Series 6875, CESifo Group Munich.
    19. Evers, Maria Theresia & Meier, Ina & Nicolay, Katharina, 2016. "Book-tax conformity and reporting behavior: A quasi-experiment," ZEW Discussion Papers 16-008, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    20. Alexandre Gazaniol & Catherine Laffineur, 2015. "Does Outward Foreign Direct Investment affect domestic real wages? An investigation using French micro-data," FIW Working Paper series 155, FIW.

    More about this item

    Keywords

    Transfer pricing; Tax haven; Pricing to market;

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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