A Negotiation-Based Model of Tax-Induced Transfer Pricing

Arbeitspapier

We present a new model of tax induced transfer pricing as an alternative to the oft-used concealment model. Inspired by interviews with practitioners, we consider a large multinational firm which is audited by the tax authority in the high-tax location. When this country adjusts the transfer prices proposed by the firm, the low-tax location may dispute this decision and initiate negotiations. Since negotiations are costly, the high-tax location sets a transfer price that prevents the low-tax location from entering negotiations. We compare this model's predictions to those of the concealment model. The negotiation model replicates the predictions on the tax rate effects on transfer pricing, while adding new predictions. Profit shifting is expected to fall in the high-tax country's bargaining power and to rise in firm profits and domestic firm ownership in both countries. Most importantly, profit shifting occurs even if tax enforcement is perfect. We analyze the effects of an introduction of a common consolidated corporate tax base with formula apportionment and conclude that the negotiation model may change the perspective on such a policy. Specifically, strong countries with large bargaining power may find this reform unappealing.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 4892

Classification and Topics

• Classification: Wirtschaft ; Business Taxes and Subsidies including sales and value-added (VAT) ; Fiscal Policies and Behavior of Economic Agents: Firm ; International Fiscal Issues; International Public Goods
• Subject: transfer pricing ; Nash bargaining ; tax avoidance ; corporate taxation

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Becker, Johannes ; Davies, Ronald B.
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2014

Further information

• Handle: http://hdl.handle.net/10419/102124
• Last update: 10.03.2025, 11:44 AM CET