Strategic Taxation of the Multinational Enterprise: Profit-Shifting and Globally-Joint Inputs

Denise Konan

No 199502, Working Papers from University of Hawaii at Manoa, Department of Economics

Abstract: This paper models strategic taxation policy of home and host governments when a multinational enterprise sets transfer prices on globally-joint inputs such as research and development. Tax credit and deduction allowances, as well as no taxation of foreign-earned profits, result in identical optimal transfer price solutions and national income effects in both countries. An equilibrium home tax solution is to tax foreign-earned profits at a higher rate than domestically earned profits. The multinational responds by shifting profits abroad through transfer pricing mechanisms.

Keywords: transfer pricing; strategic taxation; multinational enterprise (search for similar items in EconPapers)
JEL-codes: F2 H2 H3 L1 (search for similar items in EconPapers)
Pages: 17 pages
Date: 1995
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