Transfer pricing regulation and taxation of royalty payments

Steffen Juranek, Dirk Schindler and Guttorm Schjelderup

Journal of Public Economic Theory, 2018, vol. 20, issue 1, 67-84

Abstract: The digital economy is characterized by the use of intellectual property such as software, patents, and trademarks. The pricing of such intangibles is widely used to shift profits to low‐tax countries. We analyze the implications of different OECD methods to regulate transfer pricing and the role of a source tax on royalty payments for abusive transfer pricing. First, we show that under the traditional transfer pricing methods mispricing of royalty payments does not affect investment behavior. In contrast, the Transactional Profit Split Method that is promoted by the OECD for evaluating firms in the digital economy triggers higher investment in order to facilitate higher profit shifting. Second, royalty taxation is effective in reducing (such) abusive profit shifting, but always reduces investment. Third, a royalty tax rate below the corporate tax rate leads to overinvestment in a tax system with allowance for corporate equity (ACE).

Date: 2018
References: Add references at CitEc
Citations: View citations in EconPapers (27)

Downloads: (external link)
https://doi.org/10.1111/jpet.12260

Related works:
Working Paper: Transfer Pricing Regulation and Taxation of Royalty Payments (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:jpbect:v:20:y:2018:i:1:p:67-84

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=1097-3923

Access Statistics for this article

Journal of Public Economic Theory is currently edited by Rabah Amir, Gareth Myles and Myrna Wooders

More articles in Journal of Public Economic Theory from Association for Public Economic Theory Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().