Conflicting Transfer Pricing Incentives and the Role of Coordination

Abstract

Our study evaluates the role of coordination, at both the government and the firm level, on the transfer prices set by U.S. multinational corporations (MNCs) when income taxes and duties cannot be jointly minimized with a single transfer price. We find that either the presence of a coordinated income tax and customs enforcement regime or coordination between the income tax and customs functions alters transfer prices for these firms. Our analyses have implications for both firms and taxing authorities. Specifically, our findings suggest that MNCs might decrease their aggregate tax burdens by increasing coordination within the firm or that governments might increase their aggregate revenues by improving coordinating enforcement across taxing authorities. Our study is novel in that we document, in a specific setting, how coordination influences MNCs’ tax reporting behavior.

Transfer Pricing: Strategies, Practices, and Tax Minimization

“…In response to these challenges, researchers are using survey methods. Specific to income shifting, Blouin, Krull, and Robinson (2012a) and Blouin et al (2012b) use survey data from the Bureau of Economic Analysis (BEA) to identify intrafirm trade between U.S. parents and their foreign affiliates. However, data on which firms achieve their income shifting to a greater or lesser extent, as well as why or how, are not available.…”

Consumption Taxes and Corporate Tax Planning - Evidence from European Service Firms

“…Since taxable corporate profits are defined as the difference between sales and costs of goods sold, manipulating sales as the value-added tax base might constrain the flexibility to react to income tax incentives. Building on the findings of Blouin et al (2018), we conjecture that firms' profit shifting behavior depends on the consumption tax sensitivity. We predict that profit shifting behavior is attenuated if firms report sales in response to consumption taxes.…”

“…incentives. 12 We add to the recent findings of Blouin et al (2018) and show that firms consider both income and consumption taxes in their tax planning strategies and that there is a trade-off with respect to minimizing the respective tax burdens. Overall, our results indicate that firms' responsiveness to consumption taxes might explain why some firms appear not to engage in income-tax motivated profit shifting Heitzman 2010, Dharmapala 2014).…”

“…7 However, there is only limited evidence on why some firms engage in more profit shifting than others (Hanlon and Heitzman 2010). 8 Further, only a few studies examine whether firms aim to minimize both income and non-income taxes (Robinson 2012) or whether they alter their profit shifting behavior if conflicting incentives between income tax rates and customs duties arise (Swenson 2001, Blouin et al 2018. Blouin et al (2018) provide novel evidence that firms face a trade-off between minimizing income taxes and customs duties through transfer pricing.…”

“…8 Further, only a few studies examine whether firms aim to minimize both income and non-income taxes (Robinson 2012) or whether they alter their profit shifting behavior if conflicting incentives between income tax rates and customs duties arise (Swenson 2001, Blouin et al 2018. Blouin et al (2018) provide novel evidence that firms face a trade-off between minimizing income taxes and customs duties through transfer pricing. In a similar vein, this paper examines whether there are trade-offs in firms' tax planning behavior with regards to corporate income and consumption taxes.…”