Advance pricing agreements (APAs) determine transfer prices for intra-…rm 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. Nevertheless, implemented APAs lead to a Pareto improvement even when all agents are risk neutral. However, not all e¢ cient APAs are concluded in equilibrium. International agreements to avoid double taxation will likely reduce the number of realized APAs.
JEL classi…cation: H25, M41, G32Keywords: Advance Pricing Agreements, Corporate Taxation, Multinational Firms, Transfer PricingWe thank Hartmut Förster, Dirk Schindler and participants at seminars and conferences at Tübingen, Lugano and Würzburg for helpful comments. The usual disclaimer applies.
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