The economics of advance pricing agreements

Becker, Johannes; Davies, Ronald B.; Jakobs, Gitte

doi:10.1016/j.jebo.2016.12.019

Cited by 10 publications

(4 citation statements)

References 15 publications

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“…As an instrument that covers a broad range of transactions, ATRs must be distinguished from Advance Pricing Agreements (APAs), i.e., international ex ante bilateral or multilateral agreements between taxpayers and tax authorities on transfer pricing problems arising from crossborder transactions (De Waegenaere, Sansing, and Wielhouwer, 2007;Becker, Davies, and Jakobs, 2014; for an overview see Vollert, Eikel, and Sureth, 2013 Reinganum and Wilde, 1986); Erard and Feinstein, 1994). Therefore, the parties play a reporting game when not applying for an APA.…”

Section: Prior Literaturementioning

confidence: 99%

Boon or Bane? Advance Tax Rulings as a Measure to Mitigate Tax Uncertainty and Foster Investment

Diller

Kortebusch

Schneider

et al. 2016

European Accounting Review

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ABSTRACT:Politicians and tax practitioners often claim that tax uncertainty negatively affects investment. In many countries, firms can request fee-based Advance Tax Rulings (ATRs) to mitigate tax uncertainty. We analyze theoretically the circumstances under which investors request ATRs, how tax authorities should price them and how they can affect investment. We assume that tax authorities integrate investors' reasoning into their decisions. We determine the optimal fee tax authorities should charge. We find that in special cases this fee is prohibitively high, thus firms will refrain from requesting ATRs. However, we find that revenue-maximizing tax authorities offer ATRs if the ruling enables them either to significantly reduce their tax audit costs or to increase the probability of detecting ambiguous tax issues. Under certain circumstances, ATRs may effectively foster investment and potentially benefit both the tax authorities and taxpayers. Our results provide new explanations for why taxpayers that face high levels of tax uncertainty often do not request ATRs, even when the fee is rather low. Our results also hold when the tax authority maximizes social wealth instead of its revenues. Regulatory changes in ATR requirements might serve as a natural quasi-experiment for an empirical study of our predictions regarding investment decisions.

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Section: Prior Literaturementioning

confidence: 99%

Boon or Bane? Advance Tax Rulings as a Measure to Mitigate Tax Uncertainty and Foster Investment

Diller

Kortebusch

Schneider

et al. 2016

European Accounting Review

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“…The arm's length condition is a fuzzy concept, since independent prices are influenced by legitimate differences in transactions' conditions (Becker, Davies, & Jakobs, 2017;Eden, 2001; * School of Economics, Business and Accounting at Ribeirão Preto, University of São Paulo, Brazil. E-mail: alex.rathke@usp.br 1 Existing studies provide relevant evidences of profit shifting by means of direct transfer pricing adjustments (Davies, Martin, Parenti, & Toubal, 2018;Cristea & Nguyen, 2016;Bernard, Jensen, & Schott, 2006;Overesch, 2006;Bartelsman & Beetsma, 2003;Clausing, 2003;Swenson, 2001).…”

Section: Introductionmentioning

confidence: 99%

“…If the arm's length condition is not satisfied, tax authorities require the payment of taxes over the shifted profits, and a tax penalty usually applies. The arm's length condition is a fuzzy concept, since independent prices are influenced by legitimate differences in transactions' conditions (Becker, Davies, & Jakobs, 2017;Eden, 2001;OECD, 2017). It means that transfer prices are not attained to a unique true arm's length price, but rather to a range of observable parameter prices with different degrees of appropriateness with respect to the arm's length condition.…”

Section: Introductionmentioning

confidence: 99%

Fuzzy Profit Shifting: A Model for Optimal Tax-induced Transfer Pricing with Fuzzy Arm's Length Parameter

Rathke

2019

SSRN Journal

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This paper proposes a model of optimal tax-induced transfer pricing with a fuzzy arm's length parameter. Fuzzy numbers provide a suitable structure for modelling the ambiguity that is intrinsic to the arm's length parameter. For the usual conditions regarding the antishifting mechanisms, the optimal transfer price becomes a maximising α-cut of the fuzzy arm's length parameter. Nonetheless, we show that it is profitable for firms to choose any maximising transfer price if the probability of tax audit is sufficiently low, even if the chosen price is considered a completely non-arm's length price by tax authorities. In this case, we derive the necessary and sufficient conditions to prevent this extreme shifting strategy. OECD, 2017). It means that transfer prices are not attained to a unique true arm's length price, but rather to a range of observable parameter prices with different degrees of appropriateness with respect to the arm's length condition. In the case of a tax audit, the tax authority has to assess if the transfer prices applied by the MNE satisfy the arm's length condition, or if the deviations from the core of the arm's length range represent evidences of profit shifting. This is no more than an ambiguous decision to be taken by the tax authority, thus it implies in additional uncertainties for the MNE.This paper derives a model for optimal tax-induced transfer pricing subjected to a fuzzy arm's length parameter. We apply fuzzy numbers, which were first proposed by (Zadeh et al., 1965) and developed further by several researchers (Zimmermann, 1991;Klir & Yuan, 1995;Verdegay, 1982), thus to model the impact of the uncertainty that is intrinsic to the arm's length parameter over the profit-maximisation strategy. Our model follows the concealment costs approach that is traditional in profit shifting literature (Allingham & Sandmo, 1972;Kant, 1988;Hines Jr & Rice, 1994), however we design it in a generalised tax condition, which allows for the maximisation analysis without constraints on the shifting direction. The model takes the arm's length parameter as a fuzzy number, therefore the maximisation object is also a fuzzy object.Baseline analysis shows that the solution of the fuzzy maximisation object under usual conditions is a α-cut of the fuzzy arm's length parameter, and any adjustments on the transfer price up to the optimal level provide a profit-shifting gain for the MNE. Nonetheless, we show that the MNE may completely disregard the arm's length parameter if the probability of tax audits is sufficiently low. It means that it is profitable to choose any maximising transfer price if the MNE has low chances of being audited, even if the maximising transfer price is considered a completely non-arm's length price. In this sense, we derive the necessary and sufficient conditions to prevent this extreme shifting case.The remaining of this paper is structured as follows. Section 2 presents the basic notions of fuzzy sets and fuzzy numbers. Section 3 derives the general model. Section 4 solves the fuzzy ma...

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“…Third, results suggest that specialised rules related with APA and competent authority procedures may be related with higher levels of tax enforcement. We remark that these both rules invoke a mutual interaction between the taxpayers and the tax authority, and it naturally requires some flexibility degree from both parts to reach an agreement (Becker, Davies & Jakobs, 2017). In this case, the association may be twofold.…”

Section: Discussionmentioning

confidence: 99%

Studies on transfer pricing systems and profit shifting: impact of the international regulation on the shifting behaviour of Brazilian firms

Rathke¹

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The economics of advance pricing agreements

Cited by 10 publications

References 15 publications

Boon or Bane? Advance Tax Rulings as a Measure to Mitigate Tax Uncertainty and Foster Investment

Boon or Bane? Advance Tax Rulings as a Measure to Mitigate Tax Uncertainty and Foster Investment

Fuzzy Profit Shifting: A Model for Optimal Tax-induced Transfer Pricing with Fuzzy Arm's Length Parameter

Studies on transfer pricing systems and profit shifting: impact of the international regulation on the shifting behaviour of Brazilian firms

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