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Tax induced transfer pricing under universal adoption of the destination-based cash-flow tax

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Abstract

The view that the transfer pricing problem vanishes under universal destination-based cash flow taxation (DBCFT) is based on how firms behave in perfectly competitive markets. We show that the neutralizing effect DBCFT has on transfer price incentives fails once multinational firms are multi-market oligopolists. Under imperfect competition, a multinational will delegate output decisions to its affiliates. The transfer price then takes on a strategic role because it influences competitors’ actions. Even if all countries adopt DBCFT, transfer prices will not equal arm’s length prices, and the global efficiency implications attributed to DBCFT are lost.

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  • Thomas A., Gresik & Schjelderup, Guttorm, 2022. "Tax induced transfer pricing under universal adoption of the destination-based cash-flow tax," Discussion Papers 2022/8, Norwegian School of Economics, Department of Business and Management Science.
    • Handle: RePEc:hhs:nhhfms:2022_008
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    More about this item

    Keywords

    Destination-based cash-flow tax; transfer pricing; managerial delegation;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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