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Transfer Pricing by Multinational Firms: New Evidence from Foreign Firm Ownerships

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  • Cristea, Anca D.
  • Nguyen, Daniel X.

Abstract

Using a firm-level panel dataset covering the universe of Danish exports between 1999 and 2006, we find robust evidence for profit shifting by multinational corporations (MNC) through transfer pricing. Our triple difference estimation method corrects for a downward bias in previous studies. The bias results from MNCs adjusting their arm's length prices to obscure the extent of their transfer price manipulations. Our identification strategy exploits the movement in export prices to a destination in response to: (1) the establishment of a foreign affiliate by an exporter to that destination, and (2) a change in the foreign corporate tax rates. Once owning an affiliate in a country with a corporate tax rate lower than in the home country, Danish multinationals reduce the unit values of their exports there between 5.7 to 9.1 percent, on average. This reduction corresponds to $141 million in underreported export revenues in year 2006, which translates into a loss in tax income equal to 3.24 percent of Danish MNCs' tax returns.

Suggested Citation

  • Cristea, Anca D. & Nguyen, Daniel X., 2013. "Transfer Pricing by Multinational Firms: New Evidence from Foreign Firm Ownerships," MPRA Paper 61922, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:61922
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    References listed on IDEAS

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    Cited by:

    1. Anca Cristea, 2015. "The effect of communication costs on trade in headquarter services," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 151(2), pages 255-289, May.
    2. Rao, R. Kavita & Sengupta, D.P., 2014. "Action Plan on Base Erosion and Profit Shifting: An Indian Perspective," Working Papers 14/133, National Institute of Public Finance and Policy.
    3. Niels Johannesen & Thomas Tørsløv & Ludvig Wier, 2016. "Are less developed countries more exposed to multinational tax avoidance? Method and evidence from micro-data," WIDER Working Paper Series 010, World Institute for Development Economic Research (UNU-WIDER).
    4. Ronald B. Davies & Julien Martin & Mathieu Parenti & Farid Toubal, 2018. "Knocking on Tax Haven’s Door: Multinational Firms and Transfer Pricing," The Review of Economics and Statistics, MIT Press, vol. 100(1), pages 120-134, March.
    5. Linda Andersson & Patrik Karpaty & Selen Savsin, 2016. "Firm-level effects of offshoring of materials and services on relative labor demand," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 152(2), pages 321-350, May.
    6. Miethe, Jakob & Menkhoff, Lukas, 2017. "Dirty money coming home: Capital flows into and out of tax havens," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168082, Verein für Socialpolitik / German Economic Association.
    7. Cyril Chalendard, 2016. "Shifting-Profits through Tax Loopholes. Evidence from Ecuador," CESifo Working Paper Series 6240, CESifo Group Munich.
    8. Goyal, Ashima, 2015. "Emergence of cross-border taxation and firm behaviour," MPRA Paper 79819, University Library of Munich, Germany.
    9. V. Vicard, 2015. "Profit shifting through transfer pricing: evidence from French firm level trade data," Working papers 555, Banque de France.
    10. Rathke, Alex Augusto Timm & Rezende, Amaury José, 2016. "Exploring the characteristics of transfer pricing systems across countries," EconStor Preprints 130141, ZBW - German National Library of Economics.
    11. Michael Overesch & Sabine Schenkelberg & Georg Wamser, 2018. "Do US Firms Pay Less Tax than their European Peers? On Firm Characteristics, Profit Shifting Opportunities, and Tax Legislation as Determinants of Tax Differentials," CESifo Working Paper Series 6960, CESifo Group Munich.
    12. Peter Egger & Michael Stimmelmayr, 2017. "Taxation and the Multinational Firm," CESifo Working Paper Series 6384, CESifo Group Munich.
    13. Dekker, Vincent & Strohmaier, Kristina, 2017. "The effect of transfer pricing regulations on intra-industry trade," Hohenheim Discussion Papers in Business, Economics and Social Sciences 32-2017, University of Hohenheim, Faculty of Business, Economics and Social Sciences.
    14. repec:ces:ifodic:v:12:y:2015:i:4:p:19149986 is not listed on IDEAS
    15. Hayley Reynolds & Ludvig Wier, 2016. "Estimating profit shifting in South Africa using firm-level tax returns," WIDER Working Paper Series 128, World Institute for Development Economic Research (UNU-WIDER).
    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. Niels Johannesen & Jukka Pirttilä, 2016. "Capital flight and development: An overview of concepts, methods, and data sources," WIDER Working Paper Series 095, World Institute for Development Economic Research (UNU-WIDER).
    19. Niels Johannesen & Thomas Tørsløv & Ludvig Wier, 2016. "Are less developed countries more exposed to multinational tax avoidance? Method and evidence from micro-data," WIDER Working Paper Series 010b (Revised version May, World Institute for Development Economic Research (UNU-WIDER).

    More about this item

    Keywords

    corporate tax; transfer pricing; arm's length principle; triple difference; foreign ownership;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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