Supply Chain Strategies and International Tax Arbitrage

Abstract

What motivates the geographic footprint of the supply chains that multinational firms (MNFs) deploy? Traditional research in the operations and supply chain management literature tends to recommend locations primarily based on differentials in production costs and the ramifications of physical distance ignoring the role of taxation. MNFs that strategically position parts of their supply chains in low‐tax locations can allocate the profits across the divisions to improve post‐tax profits. For the profit allocation to be defensible to tax authorities, the divisional operations must possess real decision authority and bear meaningful risks. Generally speaking, the greater the transfer of risk and control, the larger the allowable allocation of profit. These transfers may also create inefficiencies due to misalignment of business goals and attitudes toward risk. We model these trade‐offs in the context of placing in a low‐tax region a subsidiary that oversees product distribution (as a limited risk distributor commissionnaire, limited risk distributor, or fully fledged distributor). Our analysis demonstrates that the MNF's preferences regarding the operating structures are not necessarily an obvious ordering based on the amount of risk and decision authority transferred to the division in the low‐tax jurisdiction. We derive and analyze threshold values of the performance parameters that describe the main trade‐offs involved in selecting an operating structure. We find some of the optimal decisions to exhibit interesting non‐monotone behavior. For instance, profits can increase when the tax rate in the low‐tax jurisdiction increases. Numerical analysis shows that the Limited‐Risk Distributor structure is rarely optimal and quantifies when each alternative dominates it.

Conflict management in a multinational firm's production shifting decisions

“…See Cachon (2003) for an excellent review of this sub-stream of literature. We note that, there is a growing body of literature that investigates how to maximize a MNF's after-tax profit and balance the conflicts between the MNF and its retail division ( Liu et al, 2015 ; Shunko et al, 2017 ; Kim et al, 2018 ; Niu et al, 2019a ). Our paper is related to these studies but our focus is the objective conflict between the CM and the MNF on production shifting, which is important in today's global operations.…”

“…Most recent studies include Hsu and Zhu (2011) , Huh and Park (2013) , Shunko et al (2014) , Xiao et al (2015) , Shunko et al (2017) , Xu et al (2018) and Hsu et al (2019) . Among them, Huh and Park (2013) , Shunko et al (2014) , Xiao et al (2015) , Shunko et al (2017) , Hsu et al (2019) focus on tax-planning that helps a MNF obtain more after-tax profits, so their concern is the corporate income tax. There is a line of research that considers China's import-export tax rules such as Hsu and Zhu (2011) and Xu et al (2018) .…”

Quality spillover, tariff, and multinational firms' local sourcing strategies

“…Shunko et al. () further show that an MNF's international tax arbitrage may result in inefficiency if it misaligns with the goals of its distributors. Different from these studies, our work contributes by studying an MNF's quality competition with a local DM, and analyze the MNF's two sourcing strategies: DS and OS.…”

Global logistics network design problem with rules of origin

“…Transfer pricing is one of the main mechanisms for allocating profit among different divisions of a firm (Shunko, Do & Tsay, 2017). Multiple papers have investigated the interaction of transfer prices and operating decisions for a firm that operates across multiple tax jurisdictions.…”

“…They show that the optimal capacity decision under the effects of tax cross-crediting can behave very differently from that of the traditional newsvendor model. Shunko et al (2017) addressed an issue of supply chain strategies and international tax arbitrage.…”