Using Bilateral Advance Pricing Agreements to Resolve Tax Transfer Pricing Disputes

37 Pages Posted: 5 Aug 2005

See all articles by Anja De Waegenaere

Anja De Waegenaere

Tilburg University - Department of Econometrics & OR, Netspar, and CentER

Richard C. Sansing

Tuck School of Business at Dartmouth

J. Wielhouwer

VU University Amsterdam

Date Written: July 21, 2005

Abstract

We investigate the use of bilateral advance pricing agreements (BAPAs) to resolve transfer pricing disputes between a taxpayer and two tax authorities. BAPAs are designed to protect firms from double taxation while reducing expected compliance costs (audits costs plus BAPA implementation costs). We identify settings in which we expect BAPAs to arise and investigate the effect of the program on compliance costs. We show that a reduction in expected compliance costs is a necessary but not sufficient condition for an agreement to be reached. Agreements are more likely to arise when the amount of income potentially subject to double taxation is low and the difference in tax rates between the two countries is high. We also show that the existence of the BAPA program can increase tax compliance costs in settings in which the absence of a BAPA conveys information to the tax authorities, inducing them to audit a taxpayer without a BAPA more intensively than they would have had the BAPA program not existed. Although this outcome is socially inefficient, it increases the expected net payoff (taxes collected less tax compliance costs) of the country with the higher tax rate.

Keywords: Bilateral advance pricing agreements, transfer pricing, tax compliance, game theory

JEL Classification: H87

Suggested Citation

De Waegenaere, Anja M.B. and Sansing, Richard C. and Wielhouwer, Jacco L., Using Bilateral Advance Pricing Agreements to Resolve Tax Transfer Pricing Disputes (July 21, 2005). Tuck School of Business Working Paper No. 2005-24. Available at SSRN: https://ssrn.com/abstract=766044 or http://dx.doi.org/10.2139/ssrn.766044

Anja M.B. De Waegenaere

Tilburg University - Department of Econometrics & OR, Netspar, and CentER ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Richard C. Sansing (Contact Author)

Tuck School of Business at Dartmouth ( email )

100 Tuck Hall
Hanover, NH 03755
United States
603-646-0392 (Phone)
603-646-1308 (Fax)

Jacco L. Wielhouwer

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
730
Abstract Views
3,314
rank
35,244
PlumX Metrics