One Set or Two Sets of Books: The Impact of a Strategic Tax Auditor

37 Pages Posted: 1 Sep 2017

See all articles by Marcel Haak

Marcel Haak

Leibniz Universität Hannover

Rebecca Reineke

Leibniz Universität Hannover

Katrin Weiskirchner-Merten

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

Stefan Wielenberg

Leibniz Universität Hannover

Date Written: July 1, 2017

Abstract

Using a game theoretical setting, this paper studies how a multinational company’s (MNC) choice of using one set (OSB) or two sets of books (TSB) is affected by a strategically acting tax auditor (TA). First, a divisionalized MNC with a producing division in a low tax country and a selling division in a high tax country chooses either OSB or TSB. With OSB, the unique transfer price coordinates the quantity decision and determines the tax payments. With TSB, two transfer prices are used for both tasks. Second, a TA may audit the MNC’s transfer prices.

It turns out that the TA’s bargaining power and his personal audit costs critically influence the MNC’s transfer pricing decision. For a low bargaining power and low audit costs, the MNC keeps OSB with positive probability. When the TA’s bargaining power is high, the negotiation benefits from using a single transfer price are outweighed by the costs of a reduced flexibility. Then, the MNC keeps TSB with either tax aggressive or compliant reported transfer prices. In addition, a raise in the tax difference induces less tax aggressive behavior. Intuitively, tax aggressiveness should be even more attractive in this case. This intuition is not true in our setting since the TA’s audit probability increases and, thus, makes profit shifting less attractive.

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

JEL Classification: H26, H87, M42

Suggested Citation

Haak, Marcel and Reineke, Rebecca and Weiskirchner-Merten, Katrin and Wielenberg, Stefan, One Set or Two Sets of Books: The Impact of a Strategic Tax Auditor (July 1, 2017). 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

Marcel Haak

Leibniz Universität Hannover ( email )

Welfengarten 1
D-30167 Hannover, 30167
Germany

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

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