 Multinational Firms’ Heterogeneity in Tax Responsiveness: The Role of Transfer PricingCeline Azemar () and Gregory Corcos The World Economy, 2009, vol. 32, issue 9, 1291-1318 Abstract: In this paper we show that the ability of multinational firms to manipulate transfer prices affects the tax sensitivity of foreign direct investment (FDI). We offer a model of international capital allocation where firms are heterogeneous in their ability to manipulate transfer prices. Perhaps paradoxically, we show that the ability to shift profits can make parent companies’ investment more sensitive to host‐country tax rates, as long as investors expect fiscal authorities to use price and profit detection methods. We then offer a comprehensive empirical study to test our predictions in the case of Japanese FDI. We exploit the finding that the unobservable ability to manipulate transfer prices is correlated with whole ownership of affiliates and R&D expenditure. Based on country, parent firm and sector characteristics, we estimate an investment equation on a sample of 3,614 Japanese affiliates in 49 emerging countries. We obtain a greater semi‐elasticity of investment to the statutory tax rate in affiliates that are wholly‐owned and that have R&D‐intensive parents. We interpret these results as indirect evidence that abusive transfer pricing is one of the determinants of FDI activity. Date: 2009 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bla:worlde:v:32:y:2009:i:9:p:1291-1318 Ordering information: This journal article can be ordered from Access Statistics for this article The World Economy is currently edited by David Greenaway More articles in The World Economy from Wiley Blackwell |
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