Keeping it Simple–Efficiency Costs of Fixed Margin Regimes in Transfer Pricing

Sebastian Beer, Sebastien Leduc and Jan Loeprick

No 2022/193, IMF Working Papers from International Monetary Fund

Abstract: Simplifying tax policy comes with costs and benefits. This paper explores simplification options for the taxation of MNEs, an area where administrative and compliance costs of the current rules are large. Simplified approaches seek to reduce these costs by relying on an approximation of the true tax base, potentially distorting resource allocation. We examine the efficiency cost of transfer pricing simplification theoretically and empirically. Using a sample of 300,000 firms located in 22 countries, we estimate that common transfer pricing practices reduce efficiency between 0.25 and 2.2 percent of total factor productivity across sectors. Focusing on the manufacturing sector, we then observe that simplification more than doubles sectoral inefficiency on average. However, large differences exist, with moderate efficiency costs in several sectors.

Keywords: Taxation of Multinational Enterprises; Transfer Pricing Simplification; Efficiency Costs; modelling transfer pricing Benchmarking; efficiency cost; annex I. descriptive statistics; simplification option; transfer pricing practice; efficiency loss; Transfer pricing; Total factor productivity; Productivity; Tax wedge; Manufacturing; Global (search for similar items in EconPapers)
Pages: 27
Date: 2022-09-23
New Economics Papers: this item is included in nep-pbe
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