Who Benefits from Inconsistent Multinational Tax Transfer Pricing Rules?

Posted: 9 Nov 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

Abstract

This paper uses a strategic tax compliance model to examine taxpayer reporting and tax authority audit strategies in an international setting with two tax authorities. The setting features both information asymmetry between the taxpayer and the tax authorities and inconsistent tax transfer pricing rules. The latter creates the possibility of each country trying to tax the same income. We study the effect of the probability of transfer price rule inconsistency on the strategies and payoffs of the taxpayer and the tax authorities. We find that an increase in the probability of transfer price rule inconsistency induces more aggressive auditing by governments. It therefore deters taxpayers from shifting income to the low-tax rate country in situations in which the transfer pricing rules are consistent, and can either increase or decrease the income reported to the low-tax country in cases in which the transfer price rules are inconsistent. We find that an increase in transfer price rule inconsistency could either increase or decrease the taxpayer's expected tax liability and could either increase or decrease the deadweight loss from auditing. Our results call into question the conventional wisdom that the prospect of double taxation due to transfer price rule inconsistency increases a firm's expected tax liability and governments' expected audit costs.

Keywords: Tax compliance, transfer pricing, double taxation, tax law inconsistency

JEL Classification: H26, K42, M41, M47

Suggested Citation

De Waegenaere, Anja M.B. and Sansing, Richard C. and Wielhouwer, Jacco L., Who Benefits from Inconsistent Multinational Tax Transfer Pricing Rules?. Contemporary Accounting Research, Vol. 23, No. 1, Spring 2006. Available at SSRN: https://ssrn.com/abstract=841545

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

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