When do firms use one set of books in an international tax compliance game?

46 Pages Posted: 1 Sep 2017 Last revised: 15 Sep 2021

See all articles by Rebecca Reineke

Rebecca Reineke

Leibniz Universität Hannover

Katrin Weiskirchner-Merten

Vienna University of Economics and Business - Department of Finance, Accounting & Statistics

Stefan Wielenberg

Leibniz Universität Hannover

Multiple version iconThere are 2 versions of this paper

Date Written: September 7, 2021

Abstract

This study examines how a strategic tax auditor affects a multinational firm's transfer pricing in a tax compliance game. Our model uses a divisionalized firm, in both a low-tax and a high-tax country, that decides to implement a transfer-pricing regime with either one or two sets of books. After observing its unit costs, the firm reports a compliant or non-compliant tax transfer price. In a regime with one set of books, the single transfer price coordinates the quantity decision and determines the tax payments. In a regime with two sets, different transfer prices serve those tasks. In contrast to previous studies, our analysis incorporates a strategic tax auditor, who observes the tax transfer price and decides whether to audit the firm. Real-world regulations suggest larger penalties for detected non-compliance under a two-sets-of-books transfer-pricing regime. Our analysis identifies the mixed strategy equilibria and examines how variations in the tax regulation - the tax rate difference and the penalty difference - affect the firm's tax aggressiveness. We show that a firm acts less tax aggressively with a higher tax rate difference. Additionally, the model predicts that the firm either increases or decreases the probability of keeping one set of books for a smaller penalty difference.

Keywords: transfer pricing, two sets of books, one set of books, strategic tax auditor

JEL Classification: H26, H87, M42

Suggested Citation

Reineke, Rebecca and Weiskirchner-Merten, Katrin and Wielenberg, Stefan, When do firms use one set of books in an international tax compliance game? (September 7, 2021). WU International Taxation Research Paper Series No. 2017-08, Available at SSRN: https://ssrn.com/abstract=3012231 or http://dx.doi.org/10.2139/ssrn.3012231

Rebecca Reineke (Contact Author)

Leibniz Universität Hannover ( email )

Welfengarten 1
D-30167 Hannover, 30167
Germany

Katrin Weiskirchner-Merten

Vienna University of Economics and Business - Department of Finance, Accounting & Statistics ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

Stefan Wielenberg

Leibniz Universität Hannover ( email )

Institut fur Rechnungslegung und WP
Koenigsworther Platz 1
Hannover, 30167
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
130
Abstract Views
2,022
rank
295,046
PlumX Metrics