Transfer Pricing and Location Choice of Intangibles Spillover and Tax Avoidance through Proﬁt Shifting
50 Pages Posted: 15 Jan 2019
Date Written: December 1, 2018
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: Suggested Citation