Transfer Pricing and Strategic Taxation of Globally Joint Inputs

Denise Konan

Review of International Economics, 1996, vol. 4, issue 2, 202-10

Abstract: This paper models strategic taxation policy of home and host governments when a multinational enterprise sets transfer prices on globally joint inputs such as research and development. Tax credit and deduction allowances, as well as no taxation of foreign-earned profits, result in identical optimal transfer-price solutions and national income effects in both countries. An equilibrium home-tax solution is to tax foreign-earned profits at a higher rate than domestically earned profits. The multinational responds by shifting profits abroad through transfer-pricing mechanisms. Copyright 1996 by Blackwell Publishing Ltd.

Date: 1996
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