Multiple Roles of Transfer Prices: One vs. Two Books

Chapter
Part of the MPI Studies in Tax Law and Public Finance book series (MPISTUD, volume 1)

Abstract

This paper investigates multiple roles of transfer prices for shipments of goods and services between entities of a multinational enterprise. At the center is the role of transfer pricing (TP) in tax manipulation, but other roles having to do with internal operations or strategic delegation, etc. are also considered. The interesting question is to what extent and how the different roles of TPs interfere with each other. The answer depends on whether companies use one or two books, i.e. whether they (can) apply different TPs for different purposes. We illustrate, in a stylized model, the competing aims of tax manipulation and strategic delegation. Finally, we briefly look at selected reform proposals, concluding that either TP problems are not addressed, or else new distortions will be introduced instead.

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Baldenius, R., N. Melumad, and S. Reichelstein (2004), Integrating managerial and tax objectives in transfer pricing, The Accounting Review 79, 591 – 615.CrossRefGoogle Scholar
  2. Czechowicz, L.J., F.D.S. Choi and V.B. Bavishi (1982), Assessing Foreign Subsidiary Performance Systems and Practices of Leading Multinational Companies, New York: Business International Corporation.Google Scholar
  3. Devereux, M. (2007), The impact of taxation on the location of capital, firms and profits. Working Paper, Oxford University Centre for Business Taxation.Google Scholar
  4. Devereux, M. and C. Keuschnigg (2009), The distorting arm's length principle, Working Paper, Oxford University Centre for Business Taxation.Google Scholar
  5. Eden, L.(1998), Taxing Multinationals: Transfer Pricing and Corporate Income Taxation in North America. Toronto: University of Toronto Press.Google Scholar
  6. Elitzur, R. and J. Mintz (1996), Transfer pricing rules and corporate tax competition, Journal of Public Economics 60, 401 – 422.CrossRefGoogle Scholar
  7. Ernst & Young (2003), Transfer Pricing 2003 Global Survey, International Tax Services.Google Scholar
  8. EU Commission (2001), Company Taxation in the Internal Market, SEC(2001) 1681, Brussels.Google Scholar
  9. Fershtman, C. and K. Judd (1987), Equilibrium incentives in oligopoly, American Economic Review 77, 927 – 940.Google Scholar
  10. Gammie, M. (1992), Corporate tax harmonisation: An ACE proposal, European Taxation 31, 238 – 242.Google Scholar
  11. Gordon, R., L. Kalambokidis and J. Slemrod (2004), Do we now collect any revenue from taxing capital income?, Journal of Public Economics 88, 981 – 1009.CrossRefGoogle Scholar
  12. Gresik, T. (2001), The taxing task of taxing transnationals, Journal of Econmic Literature 39, 800 – 838.CrossRefGoogle Scholar
  13. Gresik, T. and P. Osmundsen (2008), Transfer pricing in vertically integrated industries, International Tax and Public Finance 15, 231 – 255.CrossRefGoogle Scholar
  14. Hall, R. E. and A. Rabushka (1985), The flat tax, Stanford: Hoover Institution Press.Google Scholar
  15. Harris, D.G. and R. C. Sansing (1998), Distortions caused by the use of arm's-length transfer prices, Journal of the American Taxation Association 20, 40 – 50.Google Scholar
  16. Huizinga, H. and L. Laeven (2008), International profit shifting within multinationals: A multi-country perspective, Journal of Public Economics 92, 1164 – 1182.CrossRefGoogle Scholar
  17. Hyde, C.E. and C. Choe (2005), Keeping two sets of books: the relationship between tax and incentive transfer prices, Journal of Economics & Management Strategy 14, 165 – 186.CrossRefGoogle Scholar
  18. Katz, M. (1991), Game-playing agents: unobservable contracts as precommitments, Rand Journal of Economics 22, 307 – 328.CrossRefGoogle Scholar
  19. Lucas Mas, M. O. and G. Cottani (2010), OECD proposed revision of chapters I – III of the OECD transfer pricing guidelines: Business comments on selected issues, International Transfer Pricing Journal July/August 2010, 239 – 248.Google Scholar
  20. Maffini, G. and S. Mokkas (2011), Profit shifting and measured productivity of multinational firms, Oxford Bulletin of Economics and Statistics 73, 1 – 20.CrossRefGoogle Scholar
  21. Nielsen, S.B., P. Raimondos-Møller, and G. Schjelderup (2003), Formula apportionment and transfer pricing under oligopolistic competition, Journal of Public Economic Theory 5, 419 – 437.CrossRefGoogle Scholar
  22. Nielsen, S.B., P. Raimondos-Møller and G. Schjelderup (2008), Taxes and Decision Rights in Multinationals, Journal of Public Economic Theory 10, 245 – 258.CrossRefGoogle Scholar
  23. Nielsen, S.B., P. Raimondos-Møller, and G. Schjelderup (2010), Company taxation and tax spillovers: separate accounting versus formula apportionment, European Economic Review 54, 121 – 132.CrossRefGoogle Scholar
  24. OECD (2010), OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2010, Paris.Google Scholar
  25. Sansing, R.C. (1999), Relationship-specific investments and the transfer pricing paradox, Review of Accounting Studies 4, 119 – 134.CrossRefGoogle Scholar
  26. Schjelderup, G. and L. Sørgard (1997), Transfer pricing as a strategic device for de-centralized multinationals, International Tax and Public Finance 4, 277 – 290.CrossRefGoogle Scholar
  27. Sklivas, S.D. (1987), The strategic choice of managerial incentives, Rand Journal of Economics 18, 452 – 458.CrossRefGoogle Scholar
  28. Smith, M. (2002), Tax and incentive trade-offs in multinational transfer pricing, Journal of Accounting, Auditing, & Finance 17, 209 – 236.Google Scholar
  29. US Department of the Treasury (1992), Integration of the individual and corporate tax systems: Taxing business income once, Washington, DC: US Government Printing Office.Google Scholar
  30. Vickers, J. (1985), Delegation and the theory of the firm, Economic Journal 95, 138 – 147.CrossRefGoogle Scholar
  31. Wilson, P. (1993), The role of taxes in location and sourcing decisions, In Studies in International Taxation, A. Giovannini, R. G. Hubbard, and J. Slemrod (eds.), Chicago: University of Chicago Press.Google Scholar

Copyright information

© Springer-Verlag Berlin Heidelberg 2012

Authors and Affiliations

  • Søren Bo Nielsen
    • 1
  • Pascalis Raimondos-Møller
    • 2
  1. 1.Department of EconomicsCopenhagen Business SchoolFrederiksberg CDenmark
  2. 2.Danish Research CouncilCopenhagenDenmark

Personalised recommendations