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

Journal of Management Accounting Research, Forthcoming, https://doi.org/10.2308/JMAR-19-052

WU International Taxation Research Paper Series No. 2019-01

Posted: 15 Jan 2019 Last revised: 18 Dec 2020

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

This study examines how spillovers affect a multinational company's choice of an intangible's location and the corresponding transfer price for using this intangible. Our model uses a company with a domestic division in a high-tax country and a foreign division in a low-tax country, where each division's activities generate spillovers on the other division's income. In contrast to previous studies, our analysis incorporates an intangible's optimal location when the company trades off tax minimization and efficient activities. By locating the intangible abroad, the company reduces its tax liability, whereas locating the intangible domestically yields more efficient domestic division activities. For a high spillover of the domestic division, the company locates the intangible domestically. Our model supports empirical evidence regarding intangibles' location that is interpreted as “home bias”. Additionally, we show how variations in regulatory parameters—arm's length range and tax rate differential—affect the divisions' activities and the intangible's location.

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

JEL Classification: F23, L24, H26, O34

Suggested Citation

Reineke, Rebecca and Weiskirchner-Merten, Katrin, Transfer Pricing and Location of Intangibles - Spillover and Tax Avoidance through Profit Shifting (December 1, 2018). Journal of Management Accounting Research, Forthcoming, https://doi.org/10.2308/JMAR-19-052, 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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