Scandinavian Working Papers in Economics

Discussion Papers,
Norwegian School of Economics, Department of Business and Management Science

No 2007/11: Taxes and Decision Rights in Multinationals

Søren Bo Nielsen (), Pascalis Raimondos-Møller () and Guttorm Schjelderup ()
Additional contact information
Søren Bo Nielsen: Department of Economics, Copenhagen Business School, Postal: Copenhagen Business School, Department of Economics, Porcelænshaven 16A, 1.fl., 1.85, 2000 Frederiksberg, Denmark
Pascalis Raimondos-Møller: Department of Economics, Copenhagen Business School, Postal: Copenhagen Business School, Department of Economics, Porcelænshaven 16A, 1.fl., 1.85, 2000 Frederiksberg, Denmark
Guttorm Schjelderup: Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Finance and Management Science, Helleveien 30, N-5045 Bergen, Norway

Abstract: We examine how a multinational’s choice to centralize or de-centralize its decision structure is affected by country tax differentials. Within a simple model that emphasizes the multiple conflicting roles of transfer prices in MNEs — here, as a strategic pre-commitment device and a tax manipulation instrument —, we show that decentralization is preferred in case of small tax differentials, whereas centralization can be more profitable, when tax differentials are large. In essence, the organizational flexibility of MNEs is triggered by the scope for tax minimization. Our analysis allows for both commitment and non-commitment to transfer prices, and for alternative modes of competition.

Keywords: Centralized vs. de-centralized decisions; taxes; transfer prices; MNEs

JEL-codes: F23; H25; L23

20 pages, March 27, 2007

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