Tax and tariff planning through transfer prices: The role of the head office and business unit

Saskia Kohlhase and Jacco L. Wielhouwer

Journal of Accounting and Economics, 2023, vol. 75, issue 2

Abstract: We study the roles of the head office (HO) and the business units (BUs) of a multinational corporation (MNC) in reducing income tax and tariff payments through internal transfer prices in international trades. Using confidential transfer price data of a large MNC, we analyze how the different elements of internal transfer prices set by the HO and BUs vary differently from external prices with income tax rates, tariff rates, and the tradeoff between the two. Absent severe agency conflicts, we find that the BUs contribute more to tax planning than the HO, despite that explicit incentives to do so are not included in the compensation schemes. The roles of the HO and BUs vary with product market competition, the risk of conflicts with tax and customs authorities, and agency problems within the firm. Moreover, we provide evidence of strategic trade cost allocations among BUs to reduce income taxes.

Keywords: Tax optimization; Tariff optimization; Multinational corporations; Transfer price; Incoterms (search for similar items in EconPapers)
JEL-codes: D22 D23 H26 L21 M41 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:75:y:2023:i:2:s016541012200091x

DOI: 10.1016/j.jacceco.2022.101568

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