Knocking on Tax Haven's Door: Multinational Firms and Transfer Pricing

30 Pages Posted: 16 Jan 2015

See all articles by Ronald B. Davies

Ronald B. Davies

University College Dublin (UCD)

Julien Martin

University of Quebec at Montreal (UQAM)

Mathieu Parenti

Catholic University of Louvain (UCL)

Farid Toubal

Ecole Normale Superieure de Cachan (ENS) - Departement of Economics ans Management; National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST); Centre d'Etudes Prospectives et d'Info. Internationales (CEPII)

Date Written: December 30, 2014

Abstract

This paper analyzes the transfer pricing of multinational firms. We propose a simple framework in which intra-firm prices may systematically deviate from arm’s length prices for two motives: i) pricing to market, and ii) tax avoidance. Multinational firms may decide not to avoid taxes if the risk to be sanctioned is high compared to the tax gap. Using detailed French firm-level data on arm’s length and intra-firm export prices, we find that both mechanisms are at work. The sensitivity of intra-firm prices to foreign taxes is reinforced once we control for pricing-to-market determinants. Most importantly, we find almost no evidence of tax avoidance if we disregard exports to tax havens. Back-of-the-envelope calculations suggest that tax avoidance through transfer pricing amounts to about 1% of the total corporate taxes collected by tax authorities in France. The lion’s share of this loss is driven by the exports of 450 firms to ten tax havens. As such, it may be possible to achieve significant revenue increases with minimal cost by targeting enforcement.

Keywords: transfer pricing, tax haven, pricing to market

JEL Classification: F230, H250, H260, H320

Suggested Citation

Davies, Ronald B. and Martin, Julien and Parenti, Mathieu and Toubal, Farid, Knocking on Tax Haven's Door: Multinational Firms and Transfer Pricing (December 30, 2014). CESifo Working Paper Series No. 5132. Available at SSRN: https://ssrn.com/abstract=2550105

Ronald B. Davies

University College Dublin (UCD) ( email )

Belfield, Dublin 4 4
Ireland

Julien Martin

University of Quebec at Montreal (UQAM) ( email )

PB 8888 Station DownTown
Succursale Centre Ville
Montreal, Quebec H3C3P8
Canada

Mathieu Parenti

Catholic University of Louvain (UCL) ( email )

Place Montesquieu, 3
Louvain-la-Neuve, 1348
Belgium

Farid Toubal (Contact Author)

Ecole Normale Superieure de Cachan (ENS) - Departement of Economics ans Management ( email )

France

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST) ( email )

15 Boulevard Gabriel Peri
Malakoff Cedex, 1 92245
France

Centre d'Etudes Prospectives et d'Info. Internationales (CEPII) ( email )

9 rue Georges Pitard
Paris Cedex 15, F-75015
France

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