Multinational Firms' Heterogeneity in Tax Responsiveness: The Role of Transfer Pricing

摘要

This paper attempts to shed light on the responsiveness of capital investment to foreign corporate tax rates. Our starting point has been that tax differentials encourage transfer pricing abuse, and that some firms have a greater ability to manipulate transfer prices. Our theoretical model shows, under mild assumptions on technology and the detection of abusive transfer pricing, that such firms will invest more in low-tax countries. The intuition is that multinationals engaging in abusive transfer pricing will try to maintain standard profit-to-assets ratios in order to minimise the risk of detection and punishment. While we cannot observe abusive transfer pricing, the literature suggests that some parent firm and affiliate characteristics are correlated with a greater ability to shift income. In particular we expect R&D-intensive parent firms investing in wholly-owned affiliates to have a greater ability to manipulate transfer prices. We show that investment by such firms will indeed be more sensitive to host-country taxation.