We thank Peter Egger, Eric Strobl, participants at the Fall 2004 Mid-West International Economics Group meeting and participants at the DIW/GEP Workshop on FDI and International Outsourcing. Any errors or omissions are the responsibilities of the authors. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
and participants of a 2002 American Economics Association session for helpful discussions and comments. We also thank Sarah Lawson for excellent research assistance. All remaining errors or omissions are our own. The views expressed herein are those of the authors and not necessarily those of the National Bureau of Economic Research.
HighlightsThis paper directly estimates the deviation in prices between those done within a multinational and those done at arm's length while controlling for firm and destination characteristics.We find significant transfer pricing behavior, with prices diverging by 11%.Transfer pricing is due primarily to tax havens, not simply low-tax countries.During our sample, transfer pricing resulted in a 1% reduction in French corporate tax revenue.
AbstractThis 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-theenvelope 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.
We thank Peter Egger, Eric Strobl, participants at the Fall 2004 Mid-West International Economics Group meeting and participants at the DIW/GEP Workshop on FDI and International Outsourcing. Any errors or omissions are the responsibilities of the authors. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
E. Maskus (CMM) estimates a regression specification based upon the "knowledge-capital" model of the Multinational Enterprise (MNE). The knowledge-capital model combines "horizontal" motivations for FDI --the desire to place production close to customers and thereby avoid trade costs --with "vertical" motivations --the desire to carry out unskilled-labor intensive production activities in locations with
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