Multinational Firms’ Heterogeneity in Tax Responsiveness: The Role of Transfer Pricing

28 Pages Posted: 15 Oct 2009

See all articles by Céline Azémar

Céline Azémar

University of Glasgow

Gregory Corcos

Norwegian School of Economics (NHH) - Department of Economics

Date Written: 0000

Abstract

In this paper we show that the ability of multinational firms to manipulate transfer prices affects the tax sensitivity of foreign direct investment (FDI). We offer a model of international capital allocation where firms are heterogeneous in their ability to manipulate transfer prices. Perhaps paradoxically, we show that the ability to shift profits can make parent companies’ investment more sensitive to host-country tax rates, as long as investors expect fiscal authorities to use price and profit detection methods. We then offer a comprehensive empirical study to test our predictions in the case of Japanese FDI. We exploit the finding that the unobservable ability to manipulate transfer prices is correlated with whole ownership of affiliates and R&D expenditure. Based on country, parent firm and sector characteristics, we estimate an investment equation on a sample of 3,614 Japanese affiliates in 49 emerging countries. We obtain a greater semi-elasticity of investment to the statutory tax rate in affiliates that are wholly-owned and that have R&D-intensive parents. We interpret these results as indirect evidence that abusive transfer pricing is one of the determinants of FDI activity.

Suggested Citation

Azémar, Céline and Corcos, Gregory, Multinational Firms’ Heterogeneity in Tax Responsiveness: The Role of Transfer Pricing (0000). World Economy, Vol. 32, Issue 9, pp. 1291-1318, September 2009, Available at SSRN: https://ssrn.com/abstract=1489080 or http://dx.doi.org/10.1111/j.1467-9701.2009.01210.x

Céline Azémar (Contact Author)

University of Glasgow ( email )

Adam Smith Business School
Glasgow, Scotland G12 8LE
United Kingdom

Gregory Corcos

Norwegian School of Economics (NHH) - Department of Economics ( email )

Helleveien 30
N-5035 Bergen
Norway

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