Scandinavian Working Papers in Economics
Discussion Papers,
Norwegian School of Economics, Department of Business and Management Science
No 2022/8: Tax induced transfer pricing under universal adoption of the destination-based cash-flow tax
Gresik Thomas A. () and Guttorm Schjelderup ()
Additional contact information
Gresik Thomas A.: Dept. of Economics, University of Notre Dame, Postal: University of Notre Dame , Department of Economics, 3060 Jenkins Nanovic Hall, Notre Dame, IN 46556, USA
Guttorm Schjelderup: Dept. of Business and Management Science, Norwegian School of Economics, Postal: NHH , Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway
Abstract: The view that the transfer pricing problem vanishes under universal destination-based cash flow taxation (DBCFT) is based on how firms behave in perfectly competitive markets. We show that the neutralizing effect DBCFT has on transfer price incentives fails once multinational firms are multi-market oligopolists. Under imperfect competition, a multinational will delegate output decisions to its affiliates. The transfer price then takes on a strategic role because it influences competitors’ actions. Even if all countries adopt DBCFT, transfer prices will not equal arm’s length prices, and the global efficiency implications attributed to DBCFT are lost.
Keywords: Destination-based cash-flow tax; transfer pricing; managerial delegation
JEL-codes: F23; G32; H21; H25; H26
Language: English
20 pages, February 22, 2022
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