Transfer pricing manipulation, tax penalty cost and the impact of foreign profit taxation

Alex Rathke

MPRA Paper from University Library of Munich, Germany

Abstract: This paper analyzes the optimal level of transfer pricing manipulation when the expected tax penalty is a function of the tax enforcement and the market price parameter. The arm’s length principle implies the existence of a range of acceptable prices shaped by market, and firms can manipulate transfer prices more freely if market price range is wide, or if its delimitations are difficult to determine. Home taxation of foreign profits can reduce income shifting incentive, depending on the portion of repatriation for tax purposes. We find that the limited tax credit rule tends to be a less efficient measure, nonetheless it is the most widely adopted rule by countries, so to spark the perspective of more powerful approaches for taxation of foreign profits.

Keywords: income shifting; transfer pricing manipulation; tax penalty cost; foreign profit taxation; tax enforcement; arm’s length principle. (search for similar items in EconPapers)
JEL-codes: F23 H26 (search for similar items in EconPapers)
Date: 2015-08-02
New Economics Papers: this item is included in nep-ger and nep-pbe
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:66133

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