Transfer pricing manipulation, tax penalty cost and the impact of foreign profit taxation

Alex A. T. Rathke

EconStor Conference Papers from ZBW - Leibniz Information Centre for Economics

Abstract: This paper analyzes the optimal level of transfer pricing manipulation when the expected tax penalty is a function of the tax enforcement and the market price parameter, and the multinational enterprise is subjected to distinct rules of foreign profit taxation. The application of the arm’s length principle implies the existence of a range of acceptable prices shaped by market, which influences the probability of tax penalization. It suggests that firms are able to manipulate transfer prices more freely if market price range is wide, or if its delimitations are difficult to determine. Home taxation of foreign profits can reduce income shifting incentive, depending on the portion of repatriation for tax purposes. We find that the limited tax credit rule tends to be a less efficient measure, nonetheless it is the most widely adopted rule by countries, so to spark the perspective of more powerful approaches for taxation of foreign profits.

Keywords: income shifting; transfer pricing manipulation; foreign profit taxation; tax enforcement (search for similar items in EconPapers)
JEL-codes: F23 H26 (search for similar items in EconPapers)
Date: 2015-08-16
New Economics Papers: this item is included in nep-iue and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/129075/1/r ... rofit%20taxation.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:esconf:129075

Access Statistics for this paper

More papers in EconStor Conference Papers from ZBW - Leibniz Information Centre for Economics Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().