The Economics of Advance Pricing Agreements

24 Pages Posted: 2 Dec 2014

See all articles by Johannes Becker

Johannes Becker

University of Muenster

Ronald B. Davies

University College Dublin (UCD)

Gitte Jakobs

University of Muenster

Date Written: November 28, 2014

Abstract

Advance pricing agreements (APAs) determine transfer prices for intra-firm transactions in advance. This paper interprets these contracts as a means to overcome a hold-up problem that occurs because governments cannot commit to non-excessive future tax rates. In addition, with private information, just as in practice, our APAs will be complex and require lengthy negotiations. Nevertheless, implemented APAs lead to a Pareto improvement even when all agents are risk neutral. However, not all efficient APAs are concluded in equilibrium. International agreements to avoid double taxation will likely reduce the number of realized APAs.

Keywords: advance pricing agreements, corporate taxation, multinational firms, transfer pricing

JEL Classification: H25, M41, G32

Suggested Citation

Becker, Johannes and Davies, Ronald B. and Jakobs, Gitte, The Economics of Advance Pricing Agreements (November 28, 2014). CESifo Working Paper Series No. 5079. Available at SSRN: https://ssrn.com/abstract=2532898

Johannes Becker (Contact Author)

University of Muenster

Schlossplatz 2
Muenster, D-48149
Germany

Ronald B. Davies

University College Dublin (UCD) ( email )

Belfield, Dublin 4 4
Ireland

Gitte Jakobs

University of Muenster ( email )

Schlossplatz 2
M√ľnster, D-48149
Germany

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