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Davies, Ronald B.
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Davies, Ronald B.
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Davies, Ronald B.
Research Output
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Publication
Tariff-induced transfer pricing and the CCCTB
2013-09, Davies, Ronald B.
The common consolidated corporate tax base has been suggested as a way to curb tax
avoidance by allocating profits across borders via a formula. This paper demonstrates that when transfer pricing occurs both for tariff and tax minimization, that moving from separate accounting to formula apportionment can actually increase transfer pricing. This, combined with arm's length pricing regulations, can result in lower revenues for high-tax countries and lower overall revenues. This casts additional doubt over whether such a move would have its intended, revenue-enhancing effects.
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Publication
The Economics of Advance Pricing Agreements
2014-11, Becker, Johannes, Davies, Ronald B., Jakobs, Gitte
Advance pricing agreements (APAs) determine transfer prices for intra-firm
transactions in advance. This paper interprets these contracts as a means to
overcome a hold-up problem that occurs because governments cannot commit
to non-excessive future tax rates. In addition, with private information, just as
in practice, our APAs will be complex and require lengthy negotiations. Never-
theless, implemented APAs lead to a Pareto improvement even when all agents
are risk neutral. However, not all efficient APAs are concluded in equilibrium.
International agreements to avoid double taxation will likely reduce the number
of realized APAs.
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Knocking on Tax Haven’s Door: Multinational Firms and Transfer Pricing
2014-12, Davies, Ronald B., Martin, Julien, Parenti, Mathieu, Toubal, Farid
This paper analyzes the transfer pricing of multinational firms. We propose a simple
framework in which intra-firm prices may systematically deviate from arm’s length
prices for two motives: i) pricing to market, and ii) tax avoidance. Multinational firms
may decide not to avoid taxes if the risk to be sanctioned is high compared to the
tax gap. Using detailed French firm-level data on arm’s length and intra-firm export
prices, we find that both mechanisms are at work. The sensitivity of intra-firm prices
to foreign taxes is reinforced once we control for pricing-to-market determinants. Most
importantly, we find almost no evidence of tax avoidance if we disregard exports to tax
havens. Back-of-the-envelope calculations suggest that tax avoidance through transfer
pricing amounts to about 1% of the total corporate taxes collected by tax authorities
in France. The lion’s share of this loss is driven by the exports of 450 firms to ten
tax havens. As such, it may be possible to achieve significant revenue increases with
minimal cost by targeting enforcement.
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Publication
A Negotiation-Based Model of Tax-Induced Transfer Pricing
2014-07, Becker, Johannes, Davies, Ronald B.
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.
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Publication
Negotiated Transfer Prices
2015-11, Becker, Johannes, Davies, Ronald B.
The predominant model of tax induced transfer pricing is based on the assumption that profit shifting is due to insufficient enforcement. However, evidence shows that the firms responsible for most profit shifting are also among the most frequently audited. We present an alternative model based on negotiations that avoid costly, yet uncertain, formal proceedings (e.g. court procedures). This model predicts that profit shifting increases in the tax gap even though enforcement is perfect. Further, it suggests that current efforts to streamline international tax law may have the unintended effect of increasing profit shifting.