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Transfer pricing of intrafirm sales as a profit shifting channel: evidence from German firm data

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  • Overesch, Michael

Abstract

This paper investigates whether transfer pricing of intrafirm sales within multinationals represents an important channel of company tax planning. A simple theoretical model, considering profit shifting activities of a multinational company, is used to obtain empirical implications. The empirical analysis, based on a panel of German multinationals, considers directly the supposed tax response of intrafirm sales. The analysis shows a significantly negative impact of the local tax rate on the size of balance sheet items, which reflect intrafirm sales. Thus, the results suggest that transfer pricing of intrafirm sales constitutes an important channel of companies? profit shifting activities.

Suggested Citation

  • Overesch, Michael, 2006. "Transfer pricing of intrafirm sales as a profit shifting channel: evidence from German firm data," ZEW Discussion Papers 06-084, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  • Handle: RePEc:zbw:zewdip:5477
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    References listed on IDEAS

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    1. Assaf Razin & Joel Slemrod, 1990. "Taxation in the Global Economy," NBER Books, National Bureau of Economic Research, Inc, number razi90-1.
    2. MacKie-Mason, Jeffrey K, 1990. " Do Taxes Affect Corporate Financing Decisions?," Journal of Finance, American Finance Association, vol. 45(5), pages 1471-1493, December.
    3. Haufler, Andreas & Schjelderup, Guttorm, 2000. "Corporate Tax Systems and Cross Country Profit Shifting," Oxford Economic Papers, Oxford University Press, vol. 52(2), pages 306-325, April.
    4. Swenson, Deborah L., 2001. "Tax Reforms and Evidence of Transfer Pricing," National Tax Journal, National Tax Association, vol. 54(1), pages 7-26, March.
    5. 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.
    6. Hines, James R. Jr., 1999. "Lessons From Behavioral Responses to International Taxation," National Tax Journal, National Tax Association, vol. 52(2), pages 305-322, June.
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    8. Grubert, Harry & Mutti, John, 1991. "Taxes, Tariffs and Transfer Pricing in Multinational Corporate Decision Making," The Review of Economics and Statistics, MIT Press, vol. 73(2), pages 285-293, May.
    9. Kant, Chander, 1990. "Multinational firms and government revenues," Journal of Public Economics, Elsevier, vol. 42(2), pages 135-147, July.
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    11. Jean-Thomas Bernard & Robert Weiner, 1990. "Multinational Corporations, Transfer Prices, and Taxes: Evidence from the U.S.Petroleum Industry," NBER Chapters,in: Taxation in the Global Economy, pages 123-160 National Bureau of Economic Research, Inc.
    12. Alfons Weichenrieder, 2009. "Profit shifting in the EU: evidence from Germany," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 16(3), pages 281-297, June.
    13. James R. Hines & Eric M. Rice, 1994. "Fiscal Paradise: Foreign Tax Havens and American Business," The Quarterly Journal of Economics, Oxford University Press, vol. 109(1), pages 149-182.
    14. 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.
    15. Swenson, Deborah L., 2001. "Tax Reforms and Evidence of Transfer Pricing," National Tax Journal, National Tax Association, vol. 54(n. 1), pages 7-26, March.
    16. Hines, James R. Jr., 1999. "Lessons from Behavioral Responses to International Taxation," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 305-22, June.
    17. Guttorm Schjelderup & Lars Sorgard, 1997. "Transfer Pricing as a Strategic Device for Decentralized Multinationals," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 4(3), pages 277-290, July.
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    Citations

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    Cited by:

    1. Dischinger, Matthias, 2007. "Profit Shifting by Multinationals: Indirect Evidence from European Micro Data," Discussion Papers in Economics 2029, University of Munich, Department of Economics.
    2. S. Quantin & S. Raspiller & S. Serravalle, 2009. "Intrafirm trade, taxation and transfer pricing: evidence from French data," Documents de Travail de la DESE - Working Papers of the DESE g2009-07, Institut National de la Statistique et des Etudes Economiques, DESE.
    3. V. Vicard, 2015. "Profit shifting through transfer pricing: evidence from French firm level trade data," Working papers 555, Banque de France.
    4. Gebhardt Heinz & Siemers Lars-H. R., 2017. "Die relative Steuerbelastung mittelständischer Kapitalgesellschaften: Evidenz von handelsbilanziellen Mikrodaten," Zeitschrift für Wirtschaftspolitik, De Gruyter, vol. 66(1), pages 1-35, April.
    5. 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.
    6. Giorgia Maffini & Socrates Mokkas, 2008. "Transfer-pricing and Measured Productivity of Multinational Firms," Working Papers 0817, Oxford University Centre for Business Taxation.
    7. Holzmann, Carolin Maria, 2016. "Transfer pricing as tax avoidance under different legislative schemes," Annual Conference 2016 (Augsburg): Demographic Change 145929, Verein für Socialpolitik / German Economic Association.
    8. Johannes Becker, 2014. "Strategic Trade Policy through the Tax System," The World Economy, Wiley Blackwell, vol. 37(9), pages 1237-1246, September.
    9. 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.

    More about this item

    Keywords

    Taxation; Multinationals; Profit Shifting; Transfer Pricing; Firm-level Data;

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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