No full-text available
To read the full-text of this research,
you can request a copy directly from the author.
Tax-Motivated Transfer Pricing and US Intrafirm Trade Prices
Abstract
This paper analyzes monthly data on US international trade prices between 1997 and 1999 in order to investigate the impact of tax influences on intrafirm trade prices. Results indicate that there is substantial evidence of tax-motivated transfer pricing in US intrafirm trade prices. There is a strong and statistically significant relationship between countries’ tax rates and the prices of intrafirm transactions. Controlling for other variables that affect trade prices, as country tax rates are lower, US intrafirm export prices are lower, and US intrafirm import prices are higher. This finding is consistent with theoretical predictions regarding tax-motivated income shifting behavior.
... The above article is shown in Figure 2 -it is represented by the largest circle, which, being in the green cluster, is colored green. It is followed by Clausing (2003) -63 citations (3,359 TLS) -as the most cited representative of the red cluster. Clausing (2003) analyzes monthly data on prices in U.S. international trade between 1997 and 1999 to examine the impact of tax effects on prices in intra-firm trade. ...
... It is followed by Clausing (2003) -63 citations (3,359 TLS) -as the most cited representative of the red cluster. Clausing (2003) analyzes monthly data on prices in U.S. international trade between 1997 and 1999 to examine the impact of tax effects on prices in intra-firm trade. The results suggest that there is considerable evidence of tax-motivated transfer pricing in U.S. intra-trade prices. ...
... It is followed by Clausing (2003) -63 citations (3,359 TLS) -as the most cited representative of the red cluster. Clausing (2003) analyzes monthly data on prices in U.S. international trade between 1997 and 1999 to examine the impact of tax effects on prices in intra-firm trade. The results suggest that there is considerable evidence of taxmotivated transfer pricing in U.S. intra-trade prices. ...
The objective of this study was to provide comprehensive static information in the area of transfer pricing in order to assess the current situation and attempt to establish future research priorities. The data source used is the WoS database, where 788 different articles with 21,917 corresponding references were collected for the analysis. A bibliometric approach was applied using the VoSviewer software. In comparison to Kumar et al. (2021), who presented the results of the citation analysis of the articles found in the SCOPUS database, the authors performed a first-level analysis of the articles found in the WoS database, but also a second-level analysis, which was presented as a co-citation analysis. The primary similarity arises from the use of an identical methodology at the first level of analysing different sources, while the results of the co-citation analysis allow the formation of clusters for references, sources and authors, thus closing the obvious gap in the analysis of Kumar et al. (2021). The obtained results show two logical directions of continuation and development of the studied topic. The first direction allows future researchers to have a basic understanding of the breadth and depth of currently published works and studies on transfer pricing, while the development of the treated topic should be seen in the context of filling the gaps between transfer pricing and bibliometric analysis.
... To ensure the smooth operation of intra-firm trade, MNCs are required to set prices for transactions undertaken within the group, a practice known as 'transfer pricing.' Transfer pricing is defined by the Organisation for Economic Cooperation and Development (OECD) as the process of determining the price at which a firm transfers physical commodities and intangible property or offers services to linked enterprises. For decades, multinational businesses' transfer pricing has been a heated topic because they ignore market forces when setting rates for intra-firm transactions (Clausing, 2003). Different countries' legislation and taxation systems allow MNCs to exploit tax rate disparities and maximise revenues by manipulating transfer pricing. ...
... The widespread belief that transfer pricing is used to illegally move profits in order to lower a company's tax bill is a worldwide issue that needs to be addressed. Following the Clausing (2003) model, it is easy to foresee how tax reduction factors into transfer pricing. Setting transfer prices for intra-firm transactions is a neutral business practice employed to facilitate the flow of related-party trade (Krisdianto et al., 2019). ...
... In order to minimise tax liability, intra-firm transactions are structured in a way that results in a loss for the subsidiary (or parent) company in a specific tax jurisdiction but the group business as a whole shows a profit. Transfer prices are profoundly and significantly impacted by tax rates (Clausing, 2003). The ETR is a useful metric for determining whether MNCs minimise taxable income through tax evasion when doing an analysis of the influence of tax on transfer pricing. ...
... Evidence from earlier research indicates a correlation between RPTs and taxsaving strategies (Almutairi et al., 2023). Prior investigations also verified that transfer pricing is motivated by tax minimization (Clausing, 2003). As pointed out by Almutairi et al. (2023), group companies use RPT to facilitate price negotiations, leading to transfer income that aids in reducing tax liabilities. ...
... It is rational to assume that the firm should optimize after-tax profit when determining the transfer price, thereby gaining a balance between pre-tax profitability and tax minimization (Martini, 2015). Substantial evidence supports the existence of tax-motivated transfer pricing in intracompany trade prices in the USA, according to Clausing (2003) research. Taylor and Richardson (2012) demonstrate an empirical test using 203 publicly listed Australian firms, and they find RPT (transfer pricing) represents the primary driver of tax avoidance. ...
Purpose
This study aims to examine the association between related-party transactions (RPT) and tax avoidance. The study further investigates whether government ownership improves scrutiny of tax aggressiveness activities among Taiwanese group companies.
Design/methodology/approach
The authors used 16,061 firm-year observations derived from the Taiwan Economic Journal Database (TEJ) from 2005 to 2021. The authors applied GLS fixed-effect regression. Additional tests, such as a difference-in-difference examination, propensity score matching (PSM) analysis and other tests were performed to obtain more robust results.
Findings
The results show different consequences between eliminated and non-eliminated RPT toward tax avoidance. RPT enhances tax benefits aligned with the efficient contracting hypothesis. Under varying degrees of government control, this paper empirically reveals that government ownership has a role in mitigating tax avoidance. This implies that government control improves corporate governance by balancing opportunistic and efficiency-based tax avoidance.
Practical implications
This paper provides substantial practical implications since using the strategy of reducing taxes through RPT will result in greater tax savings at the business group level. Therefore, RPT is beneficial for enhancing business efficiency. Furthermore, government control increases corporate governance quality, which could lead to balancing tax aggressiveness activity.
Originality/value
Using a unique setting for RPT reporting in Taiwan, this paper divides RPT into eliminated and non-eliminated RPT. The findings offer significant insight for policymakers, investors and managers regarding the utilization of RPT to enhance efficiency in business groups. Additionally, this paper highlights the role of government control in preserving a harmonious balance in tax planning practices.
... Numerous studies show that the values and the direction of internal sales and internal debt of multinational rms vary systematically with the dierence in tax rates across countries, and that rms disclose excessively large prots in related parties located in lowtax countries [2,9,28,14]. Most ndings are obtained from rms in the U.S. and in European countries [13,12,25,11,30,4,6,19,1,8,3], for these countries have historically implemented the arm's length principle at the core of their transfer pricing regulations [27,23,35]. The existing evidence leads to the challenge to assess whether the arm's length principle is eective. ...
... Further details in the Appendix. 8 For any two values x, y ∈ R, the relation x ∼ y means 'x is sign-preserving monotonic transformation of y'. ...
This study analyses the tax-induced profit shifting behaviour of firms and the impact of governments' anti-shifting rules. We derive a model of a firm that combines internal sales and internal debt in a full profit shifting strategy, and which is required to apply the arm's length principle and a general thin capitalisation rule. We find several cases where the firm may shift profits to low-tax countries while satisfying the usual arm's length conditions in all countries. Internal sales and internal debt may be regarded either as complementary or as substitute shifting channels, depending on how the implicit concealment costs vary after changes in all transactions. We show that the cross-effect between the shifting channels facilitates profit shifting by means of accepted transfer prices and interest rates.
... The upstream subsidiary's marginal cost of production was still focal in setting optimal transfer prices, but fiscal arbitrage might also weigh in. The central role usually ascribed to transfer prices is to reduce the firm's overall taxes on profits (see, for instance, Bartelsman and Beetsma, 2003;Clausing, 2003;Cristea and Nguyen, 2016;Davies et al., 2018). 4 The strategic role of transfer pricing was then raised by, among others, Narayanan and Smith (2000) and Göx (2000). ...
... One upshot of this exercise is that, since ∂τ ∂s D > 0, an increase of the tax on profit imposed by the downstream jurisdiction leads the multidivisional firm to raise its transfer price; on the other hand, since ∂τ ∂s U < 0, an increase of the tax on profit occurring in the upstream jurisdiction makes the firm decrease τ . This is consistent with one of the main prediction of the transfer pricing literature: the multidivisional firm uses transfer prices to shift revenue from high-taxes to low-taxes jurisdictions, thereby increasing its overall after-tax profit (Clausing, 2003;Cristea & Nguyen, 2016). ...
... The upstream subsidiary's marginal cost of production was still focal in setting optimal transfer prices, but fiscal arbitrage might also weigh in. The central role usually ascribed to transfer prices is to reduce the firm's overall taxes on profits (see, for instance, Bartelsman and Beetsma, 2003;Clausing, 2003;Cristea and Nguyen, 2016;Davies et al., 2018). 4 The strategic role of transfer pricing was then raised by, among others, Narayanan and Smith (2000) and Göx (2000). ...
... One upshot of this exercise is that, since ∂τ ∂s D > 0, an increase of the tax on profit imposed by the downstream jurisdiction leads the multidivisional firm to raise its transfer price; on the other hand, since ∂τ ∂s U < 0, an increase of the tax on profit occurring in the upstream jurisdiction makes the firm decrease τ . This is consistent with one of the main prediction of the transfer pricing literature: the multidivisional firm uses transfer prices to shift revenue from high-taxes to low-taxes jurisdictions, thereby increasing its overall after-tax profit (Clausing, 2003;Cristea & Nguyen, 2016). ...
... cross-border tax planning by multinational firms (Clausing, 2016). Multinational firms artificially shift their profits from high-tax countries to low-tax countries through transfer pricing (Clausing, 2003;Davies et al., 2018;De Simone et al., 2019), intrafirm debt (Buettner et al., 2012;Desai et al., 2004;Fuest et al., 2011;Huizinga et al., 2008;Mills & Newberry, 2004) and locating intellectual property assets in low-tax countries (Dischinger & Riedel, 2011;Dudar & Voget, 2016;Griffith et al., 2014;Karkinsky & Riedel, 2012). Despite extensive literature on profit shifting, its relationship with corruption is not well understood. ...
... Multinational firms artificially shift their profits from high-tax countries to low-tax countries through a number of channels. These multinational firms manipulate transfer prices for their intrafirm transactions (Clausing, 2003;Davies et al., 2018;De Simone et al., 2019). In particular, these firms reduce pre-tax profits in high-tax countries by overstating the prices of goods and services imported and understating the prices of goods and services exported. ...
We investigate the importance of corruption in shaping the profit‐shifting behaviour of multinational firms. Using country‐level panel data, we find a significant and positive correlation between corruption and profit shifting. Our findings are consistent with several theoretical arguments predicting that corruption may both facilitate and provide an incentive to firm behaviour that deprives poorer countries of much needed tax revenues. Our findings are robust across a number of corruption and profit‐shifting measures, as well as to an instrumental variable approach that controls for the potential endogeneity between profit shifting and corruption. Our findings also indicate a negative and significant relationship between financial secrecy and outward profit shifting. We conclude that corruption and financial secrecy undermine global efforts to tackle profit shifting by multinational firms.
... It is possible that this change of structure will also have an impact on the tax system. This is because there is a direct relationship between tax and the public, and changes in the structure of the public also affect the tax system (Clausing, 2016;Haberly and Wojcik, 2015;Sackey, 2014;Bird et al., 2004;Clausing, 2003;Leuthold, 1991). ...
Tax revenue is one of the common issues of both public administration and public law. The tax system is an important phenomenon that shows not only the income and cash flow of the country but also the functioning of the legal system and justice within the country. In this study, the population of Bosnia and Herzegovina and tax revenues in Turkey aimed to investigate the relationship between the demographic structure. For this purpose, the data obtained from the World Bank for the last twenty years, the gender, age ratio of the population, and some demographic variables for both countries, urban and rural population rates are associated with tax revenues. In the study, the Kolmogorov Smirnov Test was used for the normality test of data, Mann Whitney U was used for the non-normally distributed data, and the Independent Sample T-test was used for the normally distributed data. Correlation and regression analysis and Granger Causality Test were performed for both countries. According to the results of the study, changing demographic variables affect indirectly even if they are not directly influential in affecting tax revenues. Therefore, in order to ensure fairness in tax distribution and the allocation of a more effective tax distribution system, a tax system that takes into account demographic variables and evaluates regional and social differences in a better way is needed. Although Turkey to Bosnia and Herzegovina in accordance with a more comprehensive macroeconomic structure, Bosnia and Herzegovina has a more regular distribution of the tax system.
... Consequently, more comprehensive studies can be conducted to determine the threshold levels of macroeconomic variables for international tax avoidance through the BEPS practice. Countries examined/period Weichenrieder (2008) Germany/8 years from 1996 to 2003 Lane andMilesi Ferretti (2007) 145 countries/33 years from 1970 to 2004 Clausing (2003) US/3 years : 1997, 1998, 1999 ...
A selected literature review of the macro determinants of Base Erosion and Profit Shifting (BEPS) is the main purpose of this study. This was achieved by the Preferred Reporting Items for Systematic Reviews and Meta-Analysis (PRISMA) method, which was conducted using five databases (ABI-ProQuest, EBSCO, Google Scholar, Scopus, and Web of Science) published between 2003 and 2022. This selected review is based on 30 studies out of 16,700 (the larger number from Google Scholar) that were identified. The 30 selected articles were retrieved as triple listed journals in Scopus, The Chartered Association of Business Schools (ABS), and Web of Science (WoS). Our approach identifies the serious macroeconomic determinants and parameters that BEPS causes, such as severe acute international tax avoidance, which has a destructive impact on global and European economies.
... Most of the studies investigate whether companies in low-tax jurisdictions are more profitable than companies in high-tax jurisdictions or whether economic activity varies by location. Clausing (2003), through his research, was able to demonstrate that there is a significant relationship between tax rates in the United States (US) and the application of TP. Similar results were obtained by Lo et al. (2010), who clarified that taxes could influence TP decisions for companies registered in China. ...
Organisations these days are growing rapidly, and both operational activities and business networks tend to use business unit strategies to overcome operational complexity. This constantly growing environment can significantly impact multinational transfer pricing practices. The research aims to look at the historical evolution and understand how the transfer pricing concept was changed over time and how the accounting legislation influenced the concept. One tool to achieve this goal is historiography and documentary research, which we applied to make it an accessible topic for further applications, studies, and analysis.
... The presence of any of these factors is allocated one and in its absence zero. This approach is based on the prior explanations and studies and the key transfer pricing factors that they considered (Amidu et al., 2019;Clausing, 2003;OECD, 2022). The mathematical presentation of the index is as shown in equation (2): ...
Purpose
This study aims to examine the prevalence of transfer pricing and earnings management activities, and how they are impacted by corporate governance mechanisms.
Design/methodology/approach
Using the political cost theory, the study provides insights into how opportunistic managerial behaviours which have a strong link to profit shifting and tax evasion are driven by corporate governance using data from 16 listed firms for the period 2008–2020.
Findings
The results reveal that the transaction-based transfer pricing model is better than the index-based model and the accrual-based earnings management model suits the political cost theory more than the real earnings management metric. Board size and female CEO increase transfer pricing aggressiveness but board independence, CEO tenure, CEO nationality and female Board Chairwomanship reduce transfer pricing aggressiveness. The findings also reveal the role of multinational enterprise status, private ownership, industry type, firm size, financial leverage, asset tangibility and firm age. For accrual-based earnings management, board independence, CEO tenure, and female Board Chairwomanship significantly decrease earnings management. Other factors include private ownership, firm size, and firm age.
Practical implications
The findings of the study are relevant for shaping industry-level policies on earning management, transfer pricing and related-party transactions. Since these opportunistic managerial behaviours are the foremost drivers of tax avoidance and profit shifting, the findings of this study provide relevant insights for practitioners, tax and other regulatory authorities, policymakers and the academic community alike.
Originality/value
This is among the premier studies on the transfer pricing and earnings management nexus with corporate governance factors using the political cost theory, especially in the developing country context. It also reveals the significant impact of gender and suggests the need for gender diversity in corporate management.
... In particular, MNEs can reduce accounting profits in a high-tax country by overpricing imports to that country and, conversely, under-pricing exports (Hines, 1999;Newlon, 2000). Clausing (2001Clausing ( , 2003Clausing ( , 2006 analyses intra-firm and market prices in U.S. international trade. He finds that intra-firm prices in exports (imports) increase (decrease) as the tax rate in the destination (origin) country increases compared to market prices. ...
... Exchange Rate has a negative influence on transfer pricing decisions. This argument is supported by several previous studies, such as Merliyana (2020); Krisdianto (2019); Clausing (2003), andLo (2010). The analysis Merle (2019) examines the indications of transfer pricing using 40 companies registered in the French CAC where the effective tax rate (ETR) reduces the intensity of transfer pricing in French companies. ...
This investigation aims to examine transfer pricing signals that may be impacted by tax strategizing, profitability, tunneling motivations, and capital intensity. The study utilized a sample of 25 mining firms listed in Indonesia between 2015 and 2019. This study employed a quantitative methodology utilizing panel data and multiple linear regression models. The present study has determined that transfer pricing is not influenced by tax planning, profitability, and capital intensity, while tunneling incentives significantly impact transfer pricing.
... The transfer prices literature delves into various topics related to transfer pricing. This includes studies on the economic effects of transfer pricing, such as its impact on tax revenues (Clausing, 2003), multinational firm behaviour (Apriyanti et al., 2023), and economic efficiency (Barker et al., 2017). Furthermore, the literature explores the legal and regulatory aspects of transfer pricing, including the role of tax authorities and international guidelines for transfer pricing practices. ...
The transfer pricing is now not only a topic for multinational companies, but also for every company cooperating in multi-companies networks. The activity of tax administrators in the tax audit focused on transfer prices is increasing, and this issue becomes an almost standard part of a regular tax audit focused on corporate income tax. This paper deals with the issue of transfer pricing in a company evaluated as a full-fledge manufacturer, that is, a part of a multinational company. The concerned company is currently working to improve the quality of transfer pricing documentation. The purpose of this article is to demonstrate, in a brief case study, the basic procedure used to evaluate the differences between prices for independent companies and for associated companies. The evaluated transactions are compared with the data available from companies operating in the same industry. It was found that the profitability of the company is comparable to the expected profitability based on the calculated market profit range. According to the risk analysis, the main risks to the company resulting from the market environment and the poorly established transfer pricing policy.
... With Cobb-Douglas production, the stock of tangible capital does not affect π, because any 23 There is evidence of such transfer price manipulations in the literature; see, e.g., Clausing (2003); Bernard, Jensen and Schott (2006); Vicard (2015); Cristea and Nguyen (2016); Liu, Schmidt-Eisenlohr and Guo (2018). ...
Based on the concept of jointly-divided activities, the paper reveals the essence of the government’s regulation of economy as a sub-function of state’s economic functions, where the government is a bearer of society’s general economic interests. The work substantiates the positive and negative sides of the influence of international economic entities on economic policy by splitting up state’s own functions and state’s applied functions, so that the latter may contradict the former and be not corresponding to the essence of state. The author reveals the main interests of the triad of globalizers – TNCs, international organizations and developed countries. The study shows the asymmetric nature of the interaction between the open economies and the main international economic entities – international organizations and TNCs, which is due to the difference in their interests and opportunities to influence each other. The paper outlines the main causes and consequences of the negative influence of international organizations and TNCs on the government’s economic regulation in developed countries and other open economies. Revealed the problems of imposing unified rules on economic policy in transition economies by international organizations, of setting requirements for crediting, and of promoting the neoliberal concept and the austerity policy. The work analyzes the negative consequences of the influence of TNCs on state economic regulation, namely: the weakening of employees’ bargaining power and the fall of their incomes, the growth of inequality, the reduction of the tax burden on corporations, offshorization, the hypertrophied development of the financial sphere, etc. The study shows various methods to mitigate the consequences of the negative influence of TNCs on open economies. The paper highlights the main mechanisms of influence of international economic entities on state economic regulation. Revealed the main challenges of state economic regulation caused by the increasing influence of international economic entities and globalization in general. Based on these challenges, the paper highlights the following main necessary transformations of state economic regulation: (1) increasing the level of subjectivity of the state as a bearer of national interests, (2) ensuring institutional foundations for inclusive global development based on the principles of equality, justice and transparency, and (3) neutralizing the negative impact on national socio-economic security exerted by international actors.
... The results of the empirical works are quite heterogeneous and can be affected by different hypotheses, samples and methodological issues.41 Clausing (2003),Bernard et al. (2006), andFlaaen (2017) for United States;Cristea and Nguyen (2016) for Denmark;Davies et al. (2018) andVicard (2014) for France;Lohse and Riedel (2013), for Europe;Liu et al. (2017) for the United Kingdom. While the literature is quite extensive for goods trade (manufacturing), there is also evidence that this phenomenon also occurs within service trade (intellectual, financial, administrative, insurance services, etc.), where tax havens are found to play a prominent role(Hebous and Johannesen, 2015).42 ...
Following the 2007-8 financial crisis, increasing concern surrounding tax avoidance by multinational enterprises (MNEs) drew attention from academia and policy circles alike. Profit shifting practices not only impact revenue and fairness, but also exacerbate global tax competition and generate economic distortions. Tax avoidance by MNEs is achieved through several complex strategies, in which tax havens and offshore financial centres typically play a prominent role. Policy initiatives adopted under the aegis of the G20 and the OECD, including the BEPS plan and the Two-Pillar agreement, attempt to address this issue, but their
final impact remains uncertain. The interplay between the tax strategies of MNEs and governments' efforts to attract investments also distorts external economic statistics. Indeed, residency-based reporting blurs the distinction between profit-driven and genuine investments. Recent economic literature has developed methods to better allocate foreign direct investments (FDIs) and portfolio investments, revealing a different picture of international capital flows, both internationally and in Italy, where external statistics show a high incidence of tax havens
... Por su parte, Ault y Arnold, (2002) proporcionan un análisis comparativo de los sistemas tributarios de varios países, incluyendo el tratamiento de la subcapitalización y su impacto en la tributación. De la misma manera, Clausing (2003) analiza el fenómeno de la subcapitalización en el contexto de los precios de transferencia y su impacto en la tributación, como lo hacen también Hanlon y Heitzman (2010) en sus investigaciones en el campo de la tributación, incluyendo estudios sobre la subcapitalización y sus implicaciones fiscales. ...
El presente artículo aborda la problemática de la subcapitalización como práctica elusiva de impuestos, donde se realiza un análisis comparativo internacional teniendo en cuenta las reglas establecidas en la limitación de la deducibilidad de los gastos financieros. Una de estas reglas corresponde a la inclusión de un ratio fijo respecto a las ganancias antes de intereses, impuestos, depreciación y amortización (EBITDA), cuya aplicación muestra como resultado cuatro casos amparados en la legislación tributaria del Ecuador. En el primer caso, la totalidad del gasto financiero es deducible, en el segundo existen exceso de gastos financieros, por lo que solo será deducible hasta el límite máximo permitido en la normativa tributaria (20% del EBITDA), mientras que en el tercero y cuarto, todo el gasto financiero es considerado como un gasto no deducible a efectos de determinar el impuesto sobre la renta.
... We have a precise measure of vertical structure compared to the self-reported intra-firm status of transactions in the BLS data 4 and our ability to identify private labels that are and are not manufactured by the retailer gives us an effective "continuum" in the degree of double-marginalization. A general issue in the trade literature is whether the reported intra-firm prices are really allocative "transaction" prices or rather tax-avoidance and accounting fictions (as suggested by Bernard et al. (2006) and Clausing (2003)) -while the BLS classifies intra-firm transactions into market-based, cost-based, other non-market based and unknown pricing methods, the precise definition of "price" is just as problematic as the definition of "intra-firm" for the trade data. While the wholesale prices for retailer manufactured goods recorded in our data may suffer from a similar problem (despite a lesser role for transfer pricing in a domestic context), we are able to examine pass-through from one allocative price to another (commodity to retail) and to examine wholesale prices of externally-manufactured private labels that represent a lesser degree of double-marginalization than national brands while still being allocative. ...
p>
We examine the extent to which vertical and horizontal market structure can together explain incomplete retail pass-through. To answer this question, we use scanner data from a large U.S. retailer to estimate product level pass-through for three vertical structures: national brands, private label goods not manufactured by the retailer, and private label goods manufactured by the retailer. Our approach circumvents issues associated with internal firm prices and demonstrates that accounting for horizontal market structure is important for measuring the effects of vertical integration and reduced double marginalization on pass-through.
</p
... But on the other hand, this can be done by multinational companies to avoid taxes (Otusanya, 2011). This tax avoidance can occur because multinational companies have subsidiaries in various countries with different terms and tax rates (Clausing, 2003). When a country's tax rate is too high compared to other countries, multinational companies in that country will try to minimize their tax burden. ...
Transfer pricing can confer advantages to companies, such as enhancing their business competitiveness and facilitating internal fund transfers. However, in practical application, companies also exploit transfer pricing for the purpose of tax avoidance, aiming to minimize their tax liabilities. Consequently, this practice has been observed to have adverse implications for the state, specifically in terms of reduced tax revenue. To explore the impact of transfer pricing on tax avoidance, researchers undertook an empirical examination. They introduced the variable of audit quality as a moderator to assess its influence on the relationship between transfer pricing and tax avoidance. The study focused on a sample of manufacturing firms listed on the Indonesia Stock Exchange, employing a purposive sampling technique. To ascertain the effects of transfer pricing variables on tax avoidance and the moderating influence of audit quality, the researchers conducted multiple linear regression tests. The findings of the study indicate a positive association between transfer pricing and tax avoidance. This research provides valuable contributions that companies engaging in transfer pricing practices are, indeed, employing them as a form of tax avoidance strategy, aiming to minimize their corporate tax obligations. However, the study does not provide evidence supporting the notion that the quality of auditors can mitigate transfer pricing undertaken for the purpose of tax avoidance.
... These studies analyze whether the prices set on the goods and services traded between the affiliates of the multinational companies (internal or transfer prices) are being artificially over-or understated as compared with market prices (arm's length prices), or whether internal prices are sensitive to tax rates in a manner consistent with profit shifting. Swenson (2001); Clausing (2003); Bernard et al. (2006) do that type of analysis using international trade data from the U.S.; Vicard (2015) and Davies et al. (2018) use French import and export data; Cristea and Nguyen (2016) use data on Danish exports. All of these papers find evidence consistent with transfer price manipulations in the multinational firms. ...
The paper examines what happened to the profitability of foreign-acquired firms following acquisition in Norway in the period 1994–2005. Propensity score matching combined with a difference-in-difference estimator is used to show that the profitability of the firms acquired goes down significantly following the acquisition. Cost elements, driving the lower profitability of the foreign-acquired firms, are the elements that could reflect transfer price manipulations. Furthermore, the results indicate that despite deteriorating financial performance, there is no significant change in the operating efficiency, liquidity, or solvency of the acquired firms. This may indicate that the observed changes in profitability can be explained by profit shifting activities of the acquired firms.
... Because it is constructed from the actual transfer pricing data, the new measure is closer in proximity to tax-induced income shifting and is used to identify cross-sectional determinants of transfer pricing aggressiveness as frequently suggested by earlier studies (Beuselinck et al., 2015;Clausing, 2003;Grubert, 2003;Hanlon & Heitzman, 2010;Oyelere & Emmanuel, 1998;Richardson et al., 2013a;Taylor et al., 2015;Wilde & Wilson, 2018 (Cools et al., 2008;Cravens, 1997;Eden & Smith, 2011). Hence, the findings can be justifiably generalised to other countries with similar regulatory settings. ...
This thesis extends the use of confidential tax returns data to validate the reliability of existing tax avoidance measures, examine the essential determinants of transfer pricing aggressiveness, and evaluate the selection of specific tax avoidance methods in firms’ short-run and long-run tax planning. Analysing annual tax return data of the largest firms and permanent establishments operating in Indonesia from 2009 to 2017, this thesis finds consistent evidence of the partial ability of existing measures to explain the cross-sectional distribution of firms’ actual tax burdens. However, the measures seem to expose different tax avoidance constructs compared to the tax authority’s assessments. Furthermore, this thesis finds confirmation of size, financial leverage, inventory intensity, and tax havens as critical determinants of foreign affiliates’ transfer pricing aggressiveness. Nevertheless, such aggressiveness is less prevalent in the presence of other tax avoidance activities, indicating foreign affiliates’ flexibilities to adjust and complement their traditional income shifting strategy in responding to temporal tax minimisation opportunities. Finally, this thesis finds evidence of the simultaneous operation of multiple tax avoidance methods in firms’ long-run tax planning. Foreign affiliates are capable of executing more techniques relative to their purely domestic peers. In comparison, conforming tax avoidance schemes are the primary method employed by foreign affiliates, while thin capitalisations seem to be the dominant technique for domestic firms. Additionally, time-trend analysis reveals that the use of particular methods is generally decreasing over time.
Taxes have the most significant share among the usual income sources of states. Taxes, the most important part of public revenues, are considered as a burden on taxpayers and therefore this leads taxpayers to try some tax base erosive practices to minimize the tax burden. This situation necessitated states to take tax security measures to prevent revenue losses. Tax security measures are the institutions established to prevent tax base erosion primarily through taxpayers' declaration in fair manner by also including the autocontrol mechanism. Therefore, it is inevitable for the states which do not want to lose and suffer due to an erosion in their revenues to implement some tax security measures. In many countries today, various tax security measures are implemented. This chapter analyzes the tax security methods implemented in USA, Germany, and UK.
Our paper develops a new transaction cost model of tax-motivated income shifting. We analytically show that income shifted by U.S. multinational parent corporations into their tax haven subsidiaries differs from predictions based only on tax rate differences because of the transaction costs of shifting income into tax haven subsidiaries. Our model predicts that e-commerce facilitates greater income shifting by lowering the transaction costs of income-shifting operations, which theoretically supports our focus on actual income shifting instead of the traditional focus on effective tax rates alone. Empirically, we find that greater numbers of multinational corporations’ dot-sized tax havens significantly increase profits shifted out of their U.S. parent corporations and also show with a separate estimation that this amount is similar to amounts shifted into their tax haven subsidiaries, consistent with income shifting being a zero-sum strategy. This novel approach documents income shifting materially increasing with e-commerce activities that lower transaction costs.
Data Availability: Data are available from the public sources cited in the text.
JEL Classifications: H26; L81; F38; M48.
This study examines multinational companies in emerging markets, exploring their transfer pricing strategies for establishing tax havens. These companies employ various mechanisms (e.g., transfer pricing, profit transfers, and the reallocation of intangible assets) to minimize their tax liabilities. Today an increasing level of intangible assets facilitates smoother profit transfers to jurisdictions with lower tax burdens. Furthermore, these companies relocate their productive activities to tax havens, creating opportunities for corporate tax evasion and avoidance. Despite the efforts of governments and international organizations to propose the adoption of a minimum tax rate for different countries, these companies have been able to reduce or completely avoid paying taxes. Our study sample includes companies headquartered in emerging countries between 2010 and 2020. The study introduces some innovative elements, such as the variable “transfer pricing intensity,” which is derived from manual data collection. This variable enables analysis of the transfer pricing levels employed by multinational companies. In addition, a noteworthy contribution of this research is the use of an unconventional tax proxy known as AREA, which monitors the tax benefits associated with short‐ and long‐term debts. The results demonstrate that these companies employ a diverse range of instruments, often in combination, to reduce taxes in their conglomerates. These findings contribute significantly to a deeper understanding of the intricacies surrounding corporate tax optimization practices and provide valuable insights for governments in formulating robust policies that promote transparency and accountability in the international tax landscape.
We study services imports by multinational groups from tax havens and investigate to what extent those imports may have profit shifting motives. Drawing on rich data covering the universe of multinational groups with a presence in Portugal, we show that despite a high statutory rate of the corporate income tax, in the presence of strict anti-avoidance rules and a patent box regime, multinational groups do not have an excess propensity to import intra-group services from tax havens. For the havens directly targeted by anti-tax planning policies, there is even a negative excess propensity to do so. Moreover, the value of intra-group services imports from most tax havens is not found to be excessive.
Related‐party transactions (RPTs) and transfer pricing techniques are typically used by multinational enterprises to reduce their tax obligations by shifting the income to zero or to low‐tax countries. These techniques have thrived and have emerged as a significant concern for tax authorities. This study investigates the effect of tax haven utilisation on related‐party sales pricing in a sample of Australian listed firms. We find that tax haven use is positively and significantly associated with related‐party sales pricing. Moreover, we identify a positive and significant interaction between tax havens and earnings management with related‐party sales pricing. Ownership concentration and its interaction effect with tax havens are significant predictors of the increased use of related‐party sales pricing. Overall, the empirical findings demonstrate that earnings management, a high level of ownership concentration and the use of tax havens are substantial factors that enable firms to obtain tax benefits via the use of RPTs.
We investigate two cross‐border profit shifting channels used by foreign multinational enterprises (MNEs) in Australia and assess the effectiveness of the related measures adopted by the Australian Parliament to combat base erosion and profit shifting (BEPS). Overall, we find that Australian subsidiaries of foreign MNEs used tax‐induced intra‐group transfer pricing and, to a lesser extent, interest expense loading to shift profit out of Australia throughout the period from 2007 to 2020. However, we find no evidence indicating that profit shifting out of Australia via the two channels has reduced after the implementation of related BEPS countermeasures in Australia from 2013.
Purpose
The present research identifies a total of nine factors influencing tax avoidance under the international taxation regime of the developing countries and establishes a hierarchical relationship through modeling of the identified factors using modified-total interpretive structural modeling (M-TISM).
Design/methodology/approach
Due to “scale without mass” properties of the digital economy, businesses reduce their physical presence in the countries of economic activities. Aided with digital features, multinational enterprises (MNEs) avoid, abolish, or adopt flexible tax burden in the developing nations through by-passing the permanent establishment condition for company taxes or the income characterization prerequisite for royalty taxation. The present research endeavors to identify the drivers of tax avoidance in the developing countries, especially exacerbated due to digital technologies (economy). In addition, the authors also examine the hierarchical relation between the extracted drivers of tax avoidance.
Findings
This research presents a considerable driving force of elements like historical foundation of tax-treaties, dominance of the developed countries, influence of trade bodies in policy matters and finally information and communications technologies (ICTs).
Originality/value
Identified elements drive the actors like professional enablers, tax havens, international organizations, and intangible assets in the form of intellectual properties (IPs) which act upon tax arbitrage situations both under the domestic and treaty regulations, finally culminating into profit shifting, tax manipulations or avoidance.
We show that the fiscal authorities of high-tax countries can lack the incentives to combat profit shifting to tax havens. Instead, they have incentives to focus their enforcement efforts on relocating profits booked by multinationals in other high-tax countries, crowding out the enforcement on transactions that shift profits to tax havens, and reducing the global tax payments of multinational companies. The predictions of our model are motivated and supported by the analysis of two new datasets: the universe of transfer price corrections conducted by the Danish tax authority, and new cross-country data on international tax enforcement. (JEL E62, F23, H25, H26, H87, K34)
While U.S. petroleum corporations pay no U.S. tax on foreign income, they received in the 1969-1972 period a rate of return on foreign investment comparable to domestic corporate investments. The present U.S. tax system allows tax credits from one foreign country to offset U.S. taxes from foreign income, with the result that the U.S. receives virtually no corporate income tax from foreign petroleum investments. The multinational corporations use transfer pricing to shift profits between countries so that tax liabilities will be minimized. Loss of revenue to consumer countries due to transfer pricing is estimated at 240 million in 1970. (19 references) (DCK)
This paper considers the impact of international taxation on patterns of foreign direct investment and on the extent of international tax avoidance activity. Recent evidence indicates that taxation significantly influences the location of foreign direct investment, corporate borrowing, transfer pricing, dividend and royalty payments, and R&D performance. Reactions to worldwide tax rate differences, as well as to changes in international tax rules, provide important information concerning the extent to which taxpayers respond to incentives. The generally high degree of responsiveness in turn carries implications for the design of domestic as well as international tax policy.
An abstract is not available for this item.
This research investigates the extent to which U.S. multinational enterprises engage in tax-motivated income shifting between U.S. and foreign jurisdictions and whether investors recognize tax-motivated earnings management in valuing the firm. We examine a sample of 577 manufacturing companies from 1984 to 1992 and provide evidence that U.S. multinationals facing average foreign tax rates in excess of the U.S. rate shift approximately 41 billion of income to the U.S. Results are robust to a variety of sensitivity tests, and there is significant evidence of income shifting into the U.S. for all sample years and for 10 of the 16 industries within the manufacturing sector with at least 15 observations.Next, we evaluate the valuation effects of income shifting. We use our income shifting tests to identify companies which shift income into the U.S. We predict that if unshifted domestic and foreign income are priced differently and if investors recognize that a portion of foreign income is being reported as domestic income, the multiple assigned to reported domestic income will reflect that these earnings are a mix of foreign and domestic source income. Results from the valuation tests are consistent with this prediction, suggesting investors recognize the effects of income shifting in their valuations. The findings are robust to a wide range of sensitivity tests and are consistent across years and industries.
This paper explores the profit-maximizing strategy for a monopolistic firm selling to two national markets simultaneously. The choice of how much to produce and sell in each country, how much to export between the two, and what transfer price to put on intrafirm exports is shown to depend heavily on two considerations: (1) whether the marginal costs of production are rising or falling, and (2) whether tariffs are high enough for the firm to discriminate perfectly between its two national markets. After showing how the firm reacts to a given set of tariffs on imports and taxes on profits, the impact of a change in any policy variable is assessed. The relationship between a country's tariff and tax policies and its foreign trade and investment is usually analyzed by means of a general equilibrium theory.1 While certainly elegant, this analysis rests on assumptions which are not in close accord with the reality of most trade and investment activities. To be specific, the large corporations directly responsible for much trade and most investment bear little resemblance to the competitive suppliers of goods and services envisaged in a general equilibrium model. This paper shifts the focus from general to partial equilibrium analysis by exploring the impact of tariff and tax rates on the profit-maximizing strategy of a monopolistic firm selling in two countries simultaneously. My first objective will be to characterize the optimal strategy itself. How much should be produced in each country? What
Three interrelated aspects of U.S. multinational corporation activity are analyzed here: the ability to shift profits from high-tax countries to low-tax countries; the impact of host country taxes and tariffs on the distribution of real capital; and the influence of these policies on international trade patterns of the United States and host countries. The cross-sectional empirical analysis indicates that the observed pattern of reported profits in high and low-tax countries is consistent with income shifting behavior and that real investment responds to host country effective tax rates and tariffs. The United States appears both to import more from and export more to low-tax countries where MNC investment is greater, but this bilateral focus must be amplified to consider multilateral effects if trade benefits are to be projected. Copyright 1991 by MIT Press.
When the foreign subsidiary has minority local ownership and the MNF engages in transfer pricing, its intrafirm exports are always from the country with the higher marginal cost. Further, permitting deferral from home taxation of non-repatriated foreign profits changes the nature of intrafirm trade from efficient to perverse even when the foreign subsidiary is fully-owned by the MNF. Intrafirm trade differs significantly from that between unrelated buyers and sellers, and tariffs on such trade (when it is perverse) can restore global production efficiency. [F12]
Using data on the operations of U.S. parent firms and their foreign affiliates between 1982 and 1994, this paper examines the extent to which tax minimizing behavior influences intrafirm trade. The results indicate that taxes have a substantial influence on intrafirm trade flows between U.S. parent firms and their affiliates abroad; the United States has less favorable intrafirm trade balances with low tax countries. This result is anticipated if U.S. sales to affiliates in low tax countries are underpriced and U.S. purchases from affiliates in high tax countries are overpriced. Taxes are also shown to have an influence on intrafirm trade flows between different foreign affiliates of U.S. firms.
This paper reviews quantitative studies of the impact of international tax rules on the financial and real behavior of multinational firms. The evidence, much of it recent, indicates that taxation significantly influences foreign direct investment, corporate borrowing, transfer pricing, dividend and royalty payments, R&D activity, exports, bribe payments, and location choices. While taxes appear to influence a wide range of activity, the literature does not offer many subtle tests designed to distinguish different theories of the effects of taxation on multinational firms. The paper evaluates the reliability of existing evidence and its implications for the design of international tax policy.
This paper examines the effect of taxation on foreign investment and on business location within the United States. The idea is to compare the inter-state distribution of investments from certain foreign countries (those with foreign tax credit systems) with the distribution of investments from other countries. Investors from countries with foreign tax credit systems receive home-country tax credits for income taxes paid to US states, so they are less likely than are other investors to avoid investing in high-tax states. The results indicate that 1% differences in state corporate tax rates are associated with 7-9% differences between the investment shares of foreign tax credit investors and the investment shares of all others, suggesting that state taxes significantly influence the pattern of foreign direct investment in the US.
The tax haven affiliates of American corporations account for more than 20 percent of U. S. foreign direct investment, and
nearly a third of the foreign profits of U. S. firms. American companies report extraordinarily high profit rates on their
tax haven investments in 1982. This behavior implies that the revenue-maximizing tax rate for a typical haven is around 5–8
percent. American (and foreign) investment in tax havens has an uncertain effect on U. S. tax revenue, but since low tax rates
encourage American companies to shift profits out of high-tax foreign countries, it is possible that low foreign tax rates
ultimately enhance U. S. tax collections.
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.
Since unification, the debate about Germany's poor economic performance has focused on supply-side weaknesses, and the associated reform agenda sought to make low-skill labour markets more flexible. We question this diagnosis using three lines of argument. First, effective restructuring of the supply side in the core advanced industries was carried out by the private sector using institutions of the coordinated economy, including unions, works councils and blockholder owners. Second, the implementation of orthodox labour market and welfare state reforms created a flexible labour market at the lower end. Third, low growth and high unemployment are largely accounted for by the persistent weakness of domestic aggregate demand, rather than by the failure to reform the supply side. Strong growth in recent years reflects the successful restructuring of the core economy. To explain these developments, we identify the external pressures on companies in the context of increased global competition, the continuing value of the institutions of the coordinated market economy to the private sector and the constraints imposed on the use of stabilizing macroeconomic policy by these institutions. We also suggest how changes in political coalitions allowed orthodox labour market reforms to be implemented in a consensus political system.
This paper deals with the determinants and implications of the pricing of intra-firm trade by manufacturing firms operating in different countries. Intra-firm trade is defined here as transactions involving international shipments of commodities (including capital, intermediate and finished goods, but excluding technology or services) between branches or affiliates under the control of one firm. Only firms in the manufacturing sector (called multinational enterprises, MNEs, for short) are considered: while similar issues of transfer-pricing have arisen in primary sectors, they seem to have been understood more clearly and dealt with in an explicitly bargaining framework.
This report contains the results of a study of average effective tax rates for firms, domiciled in the 15 member states of the European Union, during the period 1990 to 1996. The study has two aims. Its first aim is to determine tax rates effectively experienced by firms within the European Union and compare those with the statutory tax rates of the country in which those firms were domiciled. Obviously differences in tax rates that firms experience between different European Union countries are caused in the first place by differences in the statutory tax rates between these countries (note that this study does not address causes of differences in statutory corporate income tax rates between European Union countries). However all countries may, to varying degrees, provide tax incentives that may cause the effective tax rate experienced by the firms domiciled in these countries to be different, i.e. lower, than the statutory rate. The study focuses, and this is its main motivation, on the difference between statutory tax rates and tax rates effectively paid by firms within the European Union. This difference is examined in order to determine differences in the magnitude of tax incentives provided by the governments in European member states. An effective tax rate substantially below the statutory tax rate signals the provision of substantial tax incentives. A small difference between effective and statutory tax rate signals a reluctance to provide tax incentives. The study's second(ary) aim is to investigate the extent to which the effective corporate income tax is levied `neutrally' in the 15 European member states. An example may clarify the use of the term neutral in this context. It is often argued that large firms can cause, e.g. by buying high quality tax advice, ...
Imputation and Price Indexes: Theory and Evidence from the International Price Program Taxes, tariffs and transfer pricing in multinational corporation decision making
- R C Feenstra
- E W Diewert
Feenstra, R.C., Diewert, E.W., 2000. Imputation and Price Indexes: Theory and Evidence from the International Price Program, Also available at http: / / www.bls.gov / ore / abstract / ec / ec010030.htm. Grubert, H., Mutti, J., 1991. Taxes, tariffs and transfer pricing in multinational corporation decision making. Review of Economics and Statistics 17 (2), 285–293.
Corporate Taxes—A Worldwide Summary
- Price Waterhouse
Price Waterhouse, 1997. Corporate Taxes—A Worldwide Summary. Price Waterhouse, New York, and later editions.