Transfer Pricing and Strategic Taxation of Globally Joint Inputs
REVIEW OF INTERNATIONAL ECONOMICS, MS #4106
Posted: 21 May 1998
This paper models strategic taxation policy of home and host governments when a multinational enterprise sets transfer prices on globally joint inputs such as research and development. Tax credit and deduction allowances, as well as no taxation of foreign-earned profits, result in identical optimal transfer price solutions and national income effects in both countries. An equilibrium home tax solution is to tax foreign-earned profits at a higher rate than domestically earned profits. The multinational responds by shifting profits abroad through transfer pricing mechanisms.
JEL Classification: F2, H2, H3, L1
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