Jay Pil Choi, Jota Ishikawa, Hirofumi Okoshi, 27 July 2020

It is well known that multinational enterprises take advantage of corporate tax systems worldwide to avoid taxation. Transfer pricing is one common method used for profit-shifting, as intra-firm transactions are shielded from the market mechanism. Numerous guidelines and regulations have been implemented to tackle such profit-shifting, but challenges remain. This column theoretically explores how one such regulation, the ‘arm’s length principle’, affects the licensing strategies of multinationals in the presence of a tax haven. It shows that the mere existence of this principle may lead to further profit-shifting and may worsen the welfare of high-tax countries. 

Jay Pil Choi, Taiji Furusawa, Jota Ishikawa, 26 June 2020

To address the issue of tax avoidance by multinational enterprises, governments impose transfer-pricing rules to control transfer-price manipulation. Using a theoretical framework allowing for the possibility of profit shifting, this column explores the interplay between transfer-pricing regulations and tax competition. It finds that the nature of tax competition can depend on the tightness of transfer-pricing regulation, and a tax-haven country does not always prefer lax transfer-pricing regulation. Thus, the incentives of the host and FDI source country can be aligned to set up global regulatory standards for transfer pricing.

Ronald Davies, Julien Martin, Mathieu Parenti, Farid Toubal, 05 January 2015

Allegations of tax-avoiding transfer pricing by multinational firms are common, but economic evidence is scarce. This column discusses detailed price data for intra-firm and arm’s length transactions that reveals tax-driven transfer pricing, and suggests that it may be reduced by focusing on a small number of large firms in a small number of tax havens. 

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