Do taxes influence the organizational boundaries of international firms? An incomplete-contracting model with empirical evidence
The Journal of International Trade & Economic Development, 2017, vol. 26, issue 7, 801-828
Firms that import intermediate goods choose between outsourcing and vertical integration. When corporate tax rates differ between the home country and the foreign country, the possibility of shifting income and reducing overall tax payments through transfer pricing makes integration more attractive than outsourcing. This paper develops an incomplete-contracting model in which an international firm facing tax rate differentials chooses whether or not to internalize intermediate transactions in order to trade off production efficiency and tax minimization. By shifting economic activities across borders, an integrated multinational enterprise establishes a proper transfer price and reaches the optimal profit-splitting arrangement that maximizes its total after-tax profit. This paper finds that cross-country differences in corporate tax rates and product intangibility play important roles in affecting firms’ internalization decision. Empirical analysis employing the US data also supports the theoretical findings. The positive correlation of the integration level of US firms and tax rate differentials between the US and foreign countries remains in the sample excluding tax havens.
References: View references in EconPapers View complete reference list from CitEc
Citations Track citations by RSS feed
Downloads: (external link)
Access to full text is restricted to subscribers.
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:taf:jitecd:v:26:y:2017:i:7:p:801-828
Ordering information: This journal article can be ordered from
Access Statistics for this article
The Journal of International Trade & Economic Development is currently edited by Professor Pasquale Sgro
More articles in The Journal of International Trade & Economic Development from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().