Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/65847 
Year of Publication: 
2012
Series/Report no.: 
CESifo Working Paper No. 3967
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
This article analyzes profit taxation according to the arm's length principle in a model where heterogeneous firms sort into foreign outsourcing. We show that multinational firms are able to shift profits abroad even if they fully comply with the tax code. This is because, in equilibrium, intra-firm transactions occur in firms that are better than the market at input production. Moreover, market input prices include a mark-up that arises from the bargaining between the firm and the independent supplier. Transfer prices set at market values following the arm's length principle thus systematically exceed multinationals' marginal costs, leading to a reduction of tax payments for each unit sold. The optimal organization of firms hence provides a new rationale for the empirically observed lower tax burden of multinational corporations.
Subjects: 
outsourcing
profit taxation
transfer pricing
arm's length principle
multinational firms
JEL: 
F23
H25
L22
Document Type: 
Working Paper
Appears in Collections:

Files in This Item:
File
Size
402.66 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.