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Tax Havens and Cross-border Licensing


  • Jay Pil CHOI
  • OKOSHI Hirofumi


Multinational enterprises (MNEs) are incentivized to use transfer pricing in tax planning when corporate tax rates differ in different countries. The incentive is stronger when MNEs own intangible assets which can easily be shifted across countries. To mitigate such strategic avoidance of tax payments, the OECD proposed the arm's length principle (ALP). This paper investigates how the ALP affects MNEs' licensing strategies and welfare in the presence of a tax haven. We specifically deal with two methods of the ALP: the comparable uncontrolled price method and the transactional net margin method. The ALP may distort MNEs' licensing decisions, because providing a license to unrelated firms restricts the MNE's profit-shifting opportunities due to the emergence of comparable transactions. In particular, the avoidance of licensing in the presence of the ALP may worsen domestic welfare if the licensee and the MNE's subsidiary do not compete in the domestic market, but may improve welfare if they compete.

Suggested Citation

  • Jay Pil CHOI & ISHIKAWA Jota & OKOSHI Hirofumi, 2019. "Tax Havens and Cross-border Licensing," Discussion papers 19105, Research Institute of Economy, Trade and Industry (RIETI).
  • Handle: RePEc:eti:dpaper:19105

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    Cited by:

    1. Kato, Hayato & Okoshi, Hiofumi, 2019. "Economic Integration and Agglomeration of Multinational Production with Transfer Pricing," Discussion Papers in Economics 62013, University of Munich, Department of Economics.

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