The Role of Transfer Prices in Profit-Shifting by U.S. Multinational Firms: Evidence from the 2004 Homeland Investment Act

Aaron Flaaen

No 2017-055, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Using unique transaction-level microdata, this paper documents profit-shifting behavior by U.S. multinational firms via the strategic transfer pricing of intra-firm trade. A simple model reveals how differences in tax rates, both the corporate tax rates across countries and the dividend repatriation tax rate over time, affect the worldwide profit-maximizing transfer-prices set by firms for intra-firm exports and imports. I test the predictions of the model in the context of the 2004 Homeland Investment Act (HIA), a one-time tax repatriation holiday which generated a discreet change in the incentives for U.S. firms to shift profits to low-tax jurisdictions. Matching individual trade transactions by firm, product, country, mode-of-transport, and month across arms-length and related-party transactions (following Bernard, Jensen, and Schott (2006) ) yields a measure of the transfer-price wedge at a point in time. A difference-in-difference strategy reveals that this wedge responds as predicted by the model: In the period following passage of the HIA, the export transfer price wedge increased in low-tax relative to high-tax countries, while the import transfer price wedge exhibited the opposite behavior. Consistent with the form of tax avoidance known as \"round-tripping, the results imply $6 billion USD of under-reported U.S. exports, nearly $7 billion USD of over-reported U.S. imports, and roughly $2 billion USD in foregone U.S. corporate tax receipts.

Keywords: Corporate Taxes; Intra-firm Trade; Multinational firms; Profit-Shifting; Transfer Prices (search for similar items in EconPapers)
JEL-codes: F14 F23 H25 H26 H32 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2017-05
New Economics Papers: this item is included in nep-bec, nep-dcm and nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://www.federalreserve.gov/econres/feds/files/2017055pap.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2017-55

DOI: 10.17016/FEDS.2017.055

Access Statistics for this paper

More papers in Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.) Contact information at EDIRC.
Bibliographic data for series maintained by Ryan Wolfslayer ; Keisha Fournillier ().