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A Negotiation-Based Model of Tax-Induced Transfer Pricing
Author(s)
Date Issued
2014-07
Date Available
2014-07-28T16:13:02Z
Abstract
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.
Type of Material
Working Paper
Publisher
University College Dublin. School of Economics
Series
UCD Centre for Economic Research Working Paper Series
WP14/11
Web versions
Language
English
Status of Item
Not peer reviewed
This item is made available under a Creative Commons License
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