Conflicting Transfer Pricing Incentives and the Role of Coordination

Abstract:     
Our study tests the effects of conflicting income tax and customs duty incentives on the transfer pricing behavior of multinational firms with intrafirm trade. We find that when duties are large and duty-related transfer pricing incentives conflict with income tax transfer pricing incentives, firms focus less on income tax minimization when setting transfer prices. Although the average foreign affiliate facing significantly conflicted incentives incurs increased income tax payments, we estimate that these additional taxes are more than offset by decreased duty payments. Additionally, we find that the presence of a coordinated income tax and customs enforcement regime and corporate coordination in setting transfer prices both further decrease firms’ focus on income tax minimization. Our study highlights the importance of coordination in firms’ tax reporting behavior.

Number of Pages in PDF File: 47

Keywords: transfer pricing, income shifting, customs duties, coordination

JEL Classification: H25, M40

working papers series