Transfer Pricing, Formulary Apportionment, and Productive Efficiency

46 Pages Posted: 18 Sep 2007 Last revised: 3 Feb 2008

See all articles by Anja De Waegenaere

Anja De Waegenaere

Tilburg University - Department of Econometrics & OR, Netspar, and CentER

Richard C. Sansing

Tuck School of Business at Dartmouth

Date Written: September 6, 2007

Abstract

We characterize the effects of different methods of taxing multinational income on productive efficiency in a competitive equilibrium. The efficient outcome is achieved when every firm that produces and sells domestically faces the same tax rate as a multinational firm selling into the same country. This can occur under either separate accounting or formulary apportionment. A shift from separate accounting to formulary apportionment increases productive efficiency when the weight on the sales factor is sufficiently high and decreases productive efficiency when the weight on the sales factor is sufficiently low. Equal tax rates between countries is not necessary for the efficient outcome to be achieved under either separate accounting or formulary apportionment.

Keywords: Formulary apportionment, separate accounting, transfer pricing

JEL Classification: H21, H25, M40

Suggested Citation

De Waegenaere, Anja M.B. and Sansing, Richard C., Transfer Pricing, Formulary Apportionment, and Productive Efficiency (September 6, 2007). Tuck School of Business Working Paper No. 2008-39. Available at SSRN: https://ssrn.com/abstract=1012689 or http://dx.doi.org/10.2139/ssrn.1012689

Anja M.B. De Waegenaere

Tilburg University - Department of Econometrics & OR, Netspar, and CentER ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Richard C. Sansing (Contact Author)

Tuck School of Business at Dartmouth ( email )

100 Tuck Hall
Hanover, NH 03755
United States
603-646-0392 (Phone)
603-646-1308 (Fax)

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