Sorting into Outsourcing: Are Profits Taxed at a Gorilla's Arm's Length?

Christian Bauer () and Dominika Langenmayr

Discussion Papers in Economics from University of Munich, Department of Economics

Abstract: This article analyzes profit taxation according to the arm's length principle in a new 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. Transfer prices set at market values following the arm's length principle thus systematically exceed multinationals' marginal costs. This allows for a reduction of tax payments with each unit sold. The optimal organization of firms hence provides a new rationale for the empirically observed lower tax burden of multinational corporations.

Keywords: outsourcing; profit taxation; transfer pricing; arm's length principle; multinational firms (search for similar items in EconPapers)
JEL-codes: F23 H25 L22 (search for similar items in EconPapers)
Date: 2011-09
New Economics Papers: this item is included in nep-bec and nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (28)

Downloads: (external link)
https://epub.ub.uni-muenchen.de/12312/1/Bauer_Lang ... llas_Arms_Length.pdf (application/pdf)

Related works:
Journal Article: Sorting into outsourcing: Are profits taxed at a gorilla's arm's length? (2013)
Working Paper: Sorting into outsourcing: Are profits taxed at a gorilla’s arm’s length? (2013)
Working Paper: Sorting into Outsourcing: Are Profits Taxed at a Gorilla's Arm's Length? (2012)
Working Paper: Sorting into Outsourcing: Are Profits Taxed at a Gorilla's Arm's Lenght? (2011)
Working Paper: Sorting into Outsourcing: Are Pro ts Taxed at a Gorilla's Arm's Length? (2011)
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:lmu:muenec:12312

Access Statistics for this paper

More papers in Discussion Papers in Economics from University of Munich, Department of Economics Ludwigstr. 28, 80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Tamilla Benkelberg ().