Multinational Firms' Heterogeneity in Tax Responsiveness: the Role of Transfer Pricing

Celine Azemar () and Gregory Corcos

Working Papers from Business School - Economics, University of Glasgow

Abstract: In this paper we show that the ability of multinational firms to manipulate transfer prices affects the tax sensitivity of foreign direct investment (FDI). We offer a model of international capital allocation where firms are heterogeneous in their ability to manipulate transfer prices. Perhaps paradoxically, we show that the ability to shift profits can make parent companies' investment more sensitive to host-country tax rates, as long as investors expect fiscal authorities to use price and profit detection methods. We then offer a comprehensive empirical study to test our predictions in the case of Japanese FDI. We exploit the finding that the unobservable ability to manipulate transfer prices is correlated with whole ownership of affiliates and R&D expenditure. Based on country, parent firm and sector characteristics, we estimate an investment equation on a sample of 3614 Japanese affiliates in 49 emerging countries. We obtain a greater semi-elasticity of investment to the statutory tax rate in affiliates that are wholly owned and that have R&D intensive parents. We interpret these results as indirect evidence that abusive transfer pricing is one of the determinants of FDI activity.

Keywords: International Taxation; Transfer Pricing; FDI; Ownership Structure; R&D; Japanese Investment; Tax Sparing (search for similar items in EconPapers)
JEL-codes: F23 H25 H32 (search for similar items in EconPapers)
Date: 2008-02
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.gla.ac.uk/media/media_68404_en.pdf (application/pdf)

Related works:
Journal Article: Multinational Firms’ Heterogeneity in Tax Responsiveness: The Role of Transfer Pricing (2009)
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:gla:glaewp:2008_04

Access Statistics for this paper

More papers in Working Papers from Business School - Economics, University of Glasgow Contact information at EDIRC.
Bibliographic data for series maintained by Business School Research Team ().