Debt Shifting and Transfer Pricing in a Volatile World

27 Pages Posted: 14 Jan 2021

See all articles by Nicola Comincioli

Nicola Comincioli

University of Brescia

Paolo Panteghini

University of Brescia

Sergio Vergalli

University of Brescia - Department of Economics; Fondazione Eni Enrico Mattei (FEEM), Milan

Date Written: 2020

Abstract

In this article we introduce a stochastic model with a multinational company (MNC) that exploits tax avoidance practices. We focus on both transfer pricing (TP) and debt shifting (DS) activities and show how their optimal level is chosen by the shareholders. In addition, we perform an extensive numerical simulation, fine-tuned on empirical data, to measure the impact of tax avoidance practices on the MNC’s value and to study their sensitivity to exogenous variables. We will show that: an increase in risk sharply reduces leverage and slightly decreases a MNC’s value; the cost of TP leads to a sharp reduction in the MNC’s value, whereas it does not affect leverage; the impact on MNC’s decisions is increasing in the tax rate differential; finally, the cost of DS has always a relevant impact on both MNC’s value and leverage.

JEL Classification: H250, G330, G380

Suggested Citation

Comincioli, Nicola and Panteghini, Paolo and Vergalli, Sergio, Debt Shifting and Transfer Pricing in a Volatile World (2020). CESifo Working Paper No. 8807, Available at SSRN: https://ssrn.com/abstract=3765305

Nicola Comincioli (Contact Author)

University of Brescia ( email )

Piazza del Mercato, 15
25122 Brescia
Italy

Paolo Panteghini

University of Brescia ( email )

Piazza del Mercato, 15
25122 Brescia
Italy

Sergio Vergalli

University of Brescia - Department of Economics ( email )

Via San Faustino 74B
Brescia, 25122
Italy

Fondazione Eni Enrico Mattei (FEEM), Milan ( email )

Corso Magenta 63
20123 Milan
Italy

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