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

Author

Listed:
  • Ronald B. Davies

    (University College Dublin; Institute for International Integration Studies, Trinity College Dublin; CES-Ifo)

  • Julien Martin

    (Department of Economics, Universit\'e du Qu\'ebec \`a Montr\'eal, Canada)

  • Mathieu Parenti

    (CORE-UCLouvain and IRES UCLouvain (Belgium), NRU-Higher School of Economics (Russia))

  • Farid Toubal

    (Ecole Normale Supérieure de Cachan, Paris School of Economics and CEPII, France)

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-the-envelope 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 Parenti & Farid Toubal, 2014. "Knocking on Tax Haven's Door: Multinational Firms and Transfer Pricing," The Institute for International Integration Studies Discussion Paper Series iiisdp464, IIIS.
  • Handle: RePEc:iis:dispap:iiisdp464
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    More about this item

    Keywords

    Transfer pricing; Tax haven; Pricing to market;
    All these keywords.

    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
    • 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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