Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/312208 
Year of Publication: 
2022
Citation: 
[Journal:] Review of Accounting Studies [ISSN:] 1573-7136 [Volume:] 28 [Issue:] 3 [Publisher:] Springer US [Place:] New York, NY [Year:] 2022 [Pages:] 1856-1885
Publisher: 
Springer US, New York, NY
Abstract: 
This study examines how a strategic tax auditor affects a multinational firm's transfer pricing in a tax compliance game. Our model uses a divisionalized firm, in both a low-tax and a high-tax country, that decides to implement a transfer-pricing regime with either one or two sets of books. After observing its unit costs, the firm reports a compliant or noncompliant tax transfer price. In a regime with one set of books, the single transfer price coordinates the quantity decision and determines the tax payments. In a regime with two sets, different transfer prices serve those tasks. In contrast to previous studies, our analysis incorporates a strategic tax auditor, who observes the tax transfer price and decides whether to audit the firm. Real-world regulations suggest larger penalties for detected noncompliance under a two-sets-of-books transfer-pricing regime. Our analysis identifies the mixed strategy equilibria and examines how variations in the tax regulation—the tax rate difference and the penalty difference—affect the firm's tax aggressiveness. We show that a firm acts less tax aggressively with a higher tax rate difference. Additionally, the model predicts that the firm either increases or decreases the probability of keeping one set of books for a smaller penalty difference.
Subjects: 
Transfer pricing
Two sets of books
One set of books
Strategic tax auditor
JEL: 
H26
H87
M42
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article
Document Version: 
Published Version

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