Is Consistency the Panacea? Inconsistent or Consistent Tax Transfer Prices with Strategic Taxpayer and Tax Authority Behavior

68 Pages Posted: 2 Aug 2021 Last revised: 2 Aug 2022

See all articles by Markus Diller

Markus Diller

University of Passau

Johannes Lorenz

Carl von Ossietzky University of Oldenburg; TRR 266 Accounting for Transparency

Georg Thomas Schneider

University of Graz

Caren Sureth-Sloane

Paderborn University; Vienna University of Economics and Business; TRR 266 Accounting for Transparency

Date Written: July 29, 2021

Abstract

This study investigates how strategic tax transfer pricing of a multinational company (MNC) and two tax authorities in different countries affects production and tax avoidance decisions at the firm level and tax revenues at the country level. We employ a game-theoretical model to analyze the costs and benefits of two tax transfer pricing regimes (consistency vs. inconsistency) under asymmetric information. Though tax transfer pricing harmonization is considered a promising instrument to fight undesired tax avoidance, the implications are largely unclear. We find tax avoidance in equilibrium in both countries under inconsistency. Surprisingly, we identify conditions under which low-tax countries benefit from consistency while high-tax countries benefit from inconsistency. This explains how the strategic interaction of taxpayer and tax authorities under firm-level heterogeneity challenges the implementation of consistent regimes. Understanding the implications of (in)consistent transfer pricing rules is crucial when reforming transfer pricing regulations to fight tax avoidance and double taxation.

Keywords: transfer pricing, transfer pricing inconsistency, tax avoidance, tax harmonization, strategic behavior, real effects

JEL Classification: H20, H26, C72, K34, F53

Suggested Citation

Diller, Markus and Lorenz, Johannes and Schneider, Georg Thomas and Sureth-Sloane, Caren, Is Consistency the Panacea? Inconsistent or Consistent Tax Transfer Prices with Strategic Taxpayer and Tax Authority Behavior (July 29, 2021). TRR 266 Accounting for Transparency Working Paper Series No. 57, WU International Taxation Research Paper Series No. 2021-05, Available at SSRN: https://ssrn.com/abstract=3895611 or http://dx.doi.org/10.2139/ssrn.3895611

Markus Diller (Contact Author)

University of Passau ( email )

Innstrasse 27
Passau, 94032
Germany

Johannes Lorenz

Carl von Ossietzky University of Oldenburg ( email )

Ammerländer Heerstraße 114-118
Oldenburg, 26129
Germany

TRR 266 Accounting for Transparency ( email )

Warburger Straße 100
Paderborn, 33098
Germany

Georg Thomas Schneider

University of Graz ( email )

Universitätsstrasse 15/G1
Graz, 8010
Austria

Caren Sureth-Sloane

Paderborn University ( email )

Warburger Str. 100
Paderborn, 33098
Germany

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

TRR 266 Accounting for Transparency ( email )

Warburger Straße 100
Paderborn, 33098
Germany

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