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
Posted: 15 Jan 2019 Last revised: 18 Dec 2020
Date Written: December 1, 2018
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: Suggested Citation