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Transfer Pricing by Multinational Firms: New Evidence from Foreign Firm Ownerships

Anca Cristea () and Daniel Nguyen

MPRA Paper from University Library of Munich, Germany

Abstract: Using a firm-level panel dataset covering the universe of Danish exports between 1999 and 2006, we find robust evidence for profit shifting by multinational corporations (MNC) through transfer pricing. Our triple difference estimation method corrects for a downward bias in previous studies. The bias results from MNCs adjusting their arm's length prices to obscure the extent of their transfer price manipulations. Our identification strategy exploits the movement in export prices to a destination in response to: (1) the establishment of a foreign affiliate by an exporter to that destination, and (2) a change in the foreign corporate tax rates. Once owning an affiliate in a country with a corporate tax rate lower than in the home country, Danish multinationals reduce the unit values of their exports there between 5.7 to 9.1 percent, on average. This reduction corresponds to $141 million in underreported export revenues in year 2006, which translates into a loss in tax income equal to 3.24 percent of Danish MNCs' tax returns.

Keywords: corporate tax; transfer pricing; arm's length principle; triple difference; foreign ownership (search for similar items in EconPapers)
JEL-codes: D23 F23 H25 (search for similar items in EconPapers)
Date: 2013-12-07
New Economics Papers: this item is included in nep-acc and nep-int
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Journal Article: Transfer Pricing by Multinational Firms: New Evidence from Foreign Firm Ownerships (2016) Downloads
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