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Multinational Corporations, Transfer Prices, and Taxes: Evidence from the U.S. Petroleum Industry

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  • Jean-Thomas Bernard
  • Robert J. Weiner

Abstract

Economic research on transfer-pricing behavior by multinational corporadons has emphasized theoretical modeling and institutional description. This paper presents the fiit systematic empirical analysis of transfer prices, using data from the petroleum industry. On the basis of oil imported into the United States over the period 1973 - 1984, we test two propositions: i) Are prices set by integrated companies for their internal transfers different from those prevailing in arm 's-length (i.e., inter-company) trade, when other variables, such as oil quality, are controlled for? ii) Do average effective corporate income tar rates explain observed patterns of transfer pricing? Regression analysis leads to the following conclusions: i) Transfer and arm's-length prices differ significantly for oil origznating in some countries but not all. When multiplied by the relevant import volumes, these differences are relatively smalL The revenue transferred through deviations from arm's-length prices represents two percent or less of the value of the crude oil imported by multinational companies each year. ii) The observed differences between arm's-length and transfer prices are not easily explained by average effective tax rates in exporting countries. Our results provide little support for the claim that multinational petroleum companies set their transfer prices to evade taxes. We offer several hypotheses to explain our findings.

Suggested Citation

  • Jean-Thomas Bernard & Robert J. Weiner, 1989. "Multinational Corporations, Transfer Prices, and Taxes: Evidence from the U.S. Petroleum Industry," NBER Working Papers 3013, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:3013
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    1. Sanjaya Lall, 1980. "Transfer-Pricing by Multinational Manufacturing Firms," Palgrave Macmillan Books, in: The Multinational Corporation, chapter 5, pages 110-136, Palgrave Macmillan.
    2. Jenkins, Glenn P & Wright, Brian D, 1975. "Taxation of Income of Multinational Corporations: The Case of the United States Petroleum Industry," The Review of Economics and Statistics, MIT Press, vol. 57(1), pages 1-11, February.
    3. N. E. Savin, 1980. "The Bonferroni and the Scheffé Multiple Comparison Procedures," Review of Economic Studies, Oxford University Press, vol. 47(1), pages 255-273.
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    1. Michael P. Devereux & Christian Keuschnigg, 2009. "The Distorting Arm’s Length Principle," Working Papers 0910, Oxford University Centre for Business Taxation.
    2. Elitzur, Ramy & Mintz, Jack, 1996. "Transfer pricing rules and corporate tax competition," Journal of Public Economics, Elsevier, vol. 60(3), pages 401-422, June.
    3. Keser, Claudia & Kimpel, Gerrit & Oestreicher, Andreas, 2014. "The CCCTB option: An experimental study," Center for European, Governance and Economic Development Research Discussion Papers 199, University of Goettingen, Department of Economics.
    4. Frenkel, Jacob A & Razin, Assaf, 1987. "Fiscal Policies and the World Economy; An Intertemporal Approach (Cambridge, Mass.: MIT Press, 1987)," MPRA Paper 20438, University Library of Munich, Germany.
    5. James R. Hines, Jr. & R. Glenn Hubbard, 1990. "Coming Home To America: Dividend Repatriations By U.S. Multinationals," NBER Chapters, in: Taxation in the Global Economy, pages 161-208, National Bureau of Economic Research, Inc.
    6. Ahmed, S., 2004. "Modelling corporate tax liabilities using company accounts: a new framework," Cambridge Working Papers in Economics 0412, Faculty of Economics, University of Cambridge.
    7. Raymond Fisman & Shang-Jin Wei, 2004. "Tax Rates and Tax Evasion: Evidence from "Missing Imports" in China," Journal of Political Economy, University of Chicago Press, vol. 112(2), pages 471-500, April.
    8. Keuschnigg, Christian & Devereux, Michael P., 2013. "The arm's length principle and distortions to multinational firm organization," Journal of International Economics, Elsevier, vol. 89(2), pages 432-440.
    9. Joosung Jun, 1989. "What is the Marginal Source of Funds for Foreign Investment?," NBER Working Papers 3064, National Bureau of Economic Research, Inc.
    10. Dean Yang, 2008. "Can Enforcement Backfire? Crime Displacement in the Context of Customs Reform in the Philippines," The Review of Economics and Statistics, MIT Press, vol. 90(1), pages 1-14, February.
    11. Vijay Jog & Jianmin Tang, 2001. "Tax Reforms, Debt Shifting and Tax Revenues: Multinational Corporations in Canada," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 8(1), pages 5-25, January.
    12. James R. Hines, Jr., 1990. "The Transfer Pricing Problem: Where the Profits Are," NBER Working Papers 3538, National Bureau of Economic Research, Inc.
    13. Andrew B. Bernard & J. Bradford Jensen & Peter K. Schott, 2006. "Transfer Pricing by U.S.-Based Multinational Firms," NBER Working Papers 12493, National Bureau of Economic Research, Inc.
    14. Kimberly A. Clausing, 2000. "The Impact of Transfer Pricing on Intrafirm Trade," NBER Chapters, in: International Taxation and Multinational Activity, pages 173-200, National Bureau of Economic Research, Inc.
    15. Thomas A. Gresik, 2001. "The Taxing Task of Taxing Transnationals," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 800-838, September.
    16. Michael P Devereux, 2007. "The Impact of Taxation on the Location of Capital, Firms and Profit: a Survey of Empirical Evidence," Working Papers 0702, Oxford University Centre for Business Taxation.
    17. Claudia Keser & Gerrit Kimpel & Andreas Oestreicher, 2014. "The CCCTB option – an experimental study," CIRANO Working Papers 2014s-24, CIRANO.
    18. Keser, Claudia & Kimpel, Gerrit & Oestreicher, Andreas, 2014. "The CCCTB option an experimental study," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100490, Verein für Socialpolitik / German Economic Association.
    19. Bernard, Jean-Thomas & Weiner, Robert J., 1996. "Export pricing in state-owned and private MNEs: Evidence from the international petroleum market," International Journal of Industrial Organization, Elsevier, vol. 14(5), pages 647-668, July.
    20. Clausing, Kimberly A., 2003. "Tax-motivated transfer pricing and US intrafirm trade prices," Journal of Public Economics, Elsevier, vol. 87(9-10), pages 2207-2223, September.
    21. Claudia Keser & Gerrit Kimpel & Andreas Oestreicher, 2016. "Would a CCCTB mitigate profit shifting?," CIRANO Working Papers 2016s-29, CIRANO.
    22. Overesch, Michael, 2006. "Transfer pricing of intrafirm sales as a profit shifting channel: evidence from German firm data," ZEW Discussion Papers 06-084, ZEW - Leibniz Centre for European Economic Research.
    23. Peter C. Dawson & Stephen M. Miller, 2009. "International Transfer Pricing for Goods and Intangible Asset Licenses in a Decentralized Multinational Corporation: Review and Extensions," Working Papers 0901, University of Nevada, Las Vegas , Department of Economics.

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