Strategic trade policy through the tax system

Arbeitspapier

If conventional instruments of strategic trade policy are unavailable, the system of foreign profit taxation and transfer price guidelines may serve as surrogate policy instruments. In this paper, I consider a model where firms from two countries compete with each other on a third market. I analyze optimal policy choices of the firms' residence countries aiming at strategically manipulating the competitivity of their firms on the third market. I show that, as has recently been claimed, countries prefer the tax exemption system over the tax credit system if transfer prices for headquarter services to the affiliate are close to the headquarter's variable cost and if the third country's tax rate is low (i.e., if there is a large tax differential between both locations within the firm). However, if transfer prices are high and the tax rate in the third market country is sufficiently close to the residence country's tax rate, I show that the tax credit system is an optimal tax policy choice for both countries. From a policy perspective, the view that the tax exemption system is generally the best policy response if domestic firms' competitiveness is a policy goal has to be qualified.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 3066

Classification and Topics

• Classification: Wirtschaft ; Business Taxes and Subsidies including sales and value-added (VAT) ; Multinational Firms; International Business
• Subject: corporate taxation ; repatriation tax ; transfer pricing ; Strategische Handelspolitik ; Steuerpolitik ; Unternehmensbesteuerung ; Außensteuerrecht ; Steuerbegünstigung ; Transferpreis ; Steuerliches Anrechnungsverfahren ; Steuerwettbewerb ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Becker, Johannes
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2010

Further information

• Handle: http://hdl.handle.net/10419/38882
• Last update: 10.03.2025, 11:44 AM CET