Transfer Pricing and Location Choice of Intangibles Spillover and Tax Avoidance through Profit Shifting

Reineke, Rebecca and Weiskirchner-Merten, Katrin (2018) Transfer Pricing and Location Choice of Intangibles Spillover and Tax Avoidance through Profit Shifting. WU International Taxation Research Paper Series, 2019-01. WU Vienna University of Economics and Business, Universität Wien, Vienna.

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Abstract

Large multinational companies are regularly suspected of using transfer pricing of intangibles to shift profits from high- to low-tax jurisdictions. We study the optimal transfer prices while endogenizing the location choice of intangibles and considering spillovers. In line with the initial intuition, we find that multinationals locate their intangibles in low-tax jurisdictions and deploy royalty flows to minimize tax payments. However, if multinationals face a trade-off between tax minimization and efficient spillover internalization, the so-called "home bias" might occur. Then, for a large spillover, the intangible is optimally located in the high-tax domestic country. This leads to less severe investment distortions because the spillover is internalized. In addition, the model predicts that curtailing profit shifting possibilities can either harm or facilitate multinationals' overall investments. This depends heavily on unobservable factors such as the underlying accounting system. Therefore, our analysis highlights challenges for the anti-avoidance legislation of governments.

Item Type: Paper
Additional Information: Editors: Eva Eberhartinger, Michael Lang, Rupert Sausgruber and Martin Zagler (Vienna University of Economics and Business), and Erich Kirchler (University of Vienna)
Keywords: profit shifting, intangibles, spillover, transfer pricing, location choice
Classification Codes: JEL F23, L24, H26, O34
Depositing User: ePub Administrator
Date Deposited: 16 Jan 2019 10:52
Last Modified: 22 Oct 2019 00:41
URI: https://epub.wu.ac.at/id/eprint/6784

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