Transfer Pricing and Location Choice of Intangibles Spillover and Tax Avoidance through Profit Shifting

50 Pages Posted: 15 Jan 2019

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

Date Written: December 1, 2018

Abstract

Large multinational companies are regularly suspected of using transfer pricing of intangibles to shift profits from high- to low-tax jurisdictions. We study the optimal transfer prices while endogenizing the location choice of intangibles and considering spillovers. In line with the initial intuition, we find that multinationals locate their intangibles in low-tax jurisdictions and deploy royalty flows to minimize tax payments. However, if multinationals face a trade-off between tax minimization and efficient spillover internalization, the so-called ’home bias’ might occur. Then, for a large spillover, the intangible is optimally located in the high-tax domestic country. This leads to less severe investment distortions because the spillover is internalized. In addition, the model predicts that curtailing profit shifting possibilities can either harm or facilitate multinationals’ overall investments. This depends heavily on unobservable factors such as the underlying accounting system. Therefore, our analysis highlights challenges for the anti-avoidance legislation of governments.

Keywords: profit shifting, intangibles, spillover, transfer pricing, location choice

JEL Classification: F23, L24, H26, O34

Suggested Citation

Reineke, Rebecca and Weiskirchner-Merten, Katrin, Transfer Pricing and Location Choice of Intangibles Spillover and Tax Avoidance through Profit Shifting (December 1, 2018). WU International Taxation Research Paper Series No. 2019-01. Available at SSRN: https://ssrn.com/abstract=3314732 or http://dx.doi.org/10.2139/ssrn.3314732

Rebecca Reineke

Leibniz Universität Hannover ( email )

Welfengarten 1
D-30167 Hannover, 30167
Germany

Katrin Weiskirchner-Merten (Contact Author)

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

Welthandelsplatz 1
Vienna, 1020
Austria

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