Transfer Pricing Regulation and Tax Competition
Jay Pil Choi,
Taiji Furusawa () and
Discussion papers from Research Institute of Economy, Trade and Industry (RIETI)
The paper analyzes multinational enterprises' incentives to manipulate internal transfer prices to take advantage of tax differences across countries, and implications of transfer-pricing regulations as a countermeasure against such profit shifting. We find that tax-motivated foreign direct investment (FDI) may entail inefficient internal production but may benefit consumers. Thus, encouraging transfer-pricing behavior to some extent can enhance social welfare. Furthermore, we consider tax competition between two countries in order to explore the interplay with transfer-pricing regulations. We show that the FDI source country will be willing to set a higher tax rate and tolerate some profit shifting to a tax haven country if the regulation is tight enough. We also indicate a novel mechanism through which it is the larger country that undertakes tax-motivated FDI, the pattern we often observe in reality.
Pages: 34 pages
New Economics Papers: this item is included in nep-int and nep-pbe
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Persistent link: https://EconPapers.repec.org/RePEc:eti:dpaper:20035
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