Debt Shifting and Transfer Pricing in a Volatile World

Nicola Comincioli, Paolo Panteghini and Sergio Vergalli

No 8807, CESifo Working Paper Series from CESifo

Abstract: In this article we introduce a stochastic model with a multinational company (MNC) that exploits tax avoidance practices. We focus on both transfer pricing (TP) and debt shifting (DS) activities and show how their optimal level is chosen by the shareholders. In addition, we perform an extensive numerical simulation, fine-tuned on empirical data, to measure the impact of tax avoidance practices on the MNC’s value and to study their sensitivity to exogenous variables. We will show that: an increase in risk sharply reduces leverage and slightly decreases a MNC’s value; the cost of TP leads to a sharp reduction in the MNC’s value, whereas it does not affect leverage; the impact on MNC’s decisions is increasing in the tax rate differential; finally, the cost of DS has always a relevant impact on both MNC’s value and leverage.

Keywords: capital structure; default risk; business taxation and welfare (search for similar items in EconPapers)
JEL-codes: G33 G38 H25 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-cfn, nep-ore, nep-pbe and nep-rmg
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