Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/204678
Authors: 
Greil, Stefan
Schwarz, Christian
Stein, Stefan
Year of Publication: 
2018
Series/Report no.: 
Düsseldorf Working Papers in Applied Management and Economics 42
Abstract: 
The OECD Base Erosion Profit Shifting (BEPS) Initiative as well as the current fairness oriented public discussion regarding the taxation of digital business models highlight the importance and complexity of the arm's length principle. In a theoretical model of an internationally fragmented digital good's production process, we show that fairness considerations of tax authorities (namely inequity aversion) can result in a falling apart between a perceived "fair" and arm's length distribution of profits across tax jurisdictions. Our model predicts that a multinational firm follows the fundamental paradigm of international taxation, i.e. the arm's length principle, to properly incentivize internal agents involved in the production of a digital good. However, with inequity averse tax authorities, we find that tax authorities "prefer" a more equal distribution of profits compared to the arm's length profit allocation. From a multinational firm's perspective, inequity aversion among tax authorities dampens the strategic effect to - in accordance with arm's length principle - shift profits to low tax countries.
Subjects: 
corporate income tax
profit-shifting
arm's length principle
fairness
JEL: 
H26
H25
F23
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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