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The economics of advance pricing agreements

Author

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  • Becker, Johannes
  • Davies, Ronald B.
  • Jakobs, Gitte
Abstract
Advance pricing agreements (APAs) determine transfer prices for intra-firm transactions in advance of tax filing. This paper presents a model in which these contracts serve to overcome a hold-up problem that occurs because governments cannot commit to non-excessive future tax rates. We find that implemented APAs lead to a Pareto improvement even when all agents are risk neutral. Multilateral APAs are, in general, more efficient than unilateral ones. However, not all efficient APAs are concluded in equilibrium, due to asymmetric information problems. For the same reason, equilibrium APAs are highly complex, just as in practice. Surprisingly, APAs may lead to an increase in profit shifting to the low tax location and, in most cases, do not allow for a reduction in audit capacity.

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  • Becker, Johannes & Davies, Ronald B. & Jakobs, Gitte, 2017. "The economics of advance pricing agreements," Journal of Economic Behavior & Organization, Elsevier, vol. 134(C), pages 255-268.
    • Handle: RePEc:eee:jeborg:v:134:y:2017:i:c:p:255-268
    DOI: 10.1016/j.jebo.2016.12.019
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    11. Diller, Markus & Vollert, Pia, 2011. "Economic analysis of advance tax rulings," arqus Discussion Papers in Quantitative Tax Research 122, arqus - Arbeitskreis Quantitative Steuerlehre.
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    Cited by:

    1. Chen, An & Hieber, Peter & Sureth, Caren, 2022. "Pay for tax certainty? Advance tax rulings for risky investment under multi-dimensional tax uncertainty," arqus Discussion Papers in Quantitative Tax Research 273, arqus - Arbeitskreis Quantitative Steuerlehre.
    2. Rathke, Alex A.T., 2019. "Fuzzy Profit Shifting: A Model for Optimal Tax-induced Transfer Pricing with Fuzzy Arm's Length Parameter," MPRA Paper 91425, University Library of Munich, Germany.
    3. Johannes Becker & Ronald B. Davies, 2015. "Negotiated Transfer Prices," Working Papers 201527, School of Economics, University College Dublin.
    4. Thomas Tørsløv & Ludvig Wier & Gabriel Zucman, 2023. "Externalities in International Tax Enforcement: Theory and Evidence," American Economic Journal: Economic Policy, American Economic Association, vol. 15(2), pages 497-525, May.
    5. Rathke, Alex A.T., 2019. "Fuzzy Profit Shifting: A Model for Optimal Tax-induced Transfer Pricing with Fuzzy Arm's Length Parameter," EconStor Preprints 191027, ZBW - Leibniz Information Centre for Economics.
    6. Alex A. T. Rathke & Amaury J. Rezende & Christoph Watrin & Rafael M. Antônio, 2023. "Profit shifting and the attractiveness of Advance Pricing Agreements," Journal of Business Economics, Springer, vol. 93(5), pages 817-857, July.
    7. Alex A. T. Rathke, 2019. "Fuzzy Profit Shifting: A Model for Optimal Tax-induced Transfer Pricing with Fuzzy Arm's Length Parameter," Papers 1901.03843, arXiv.org.

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    More about this item

    Keywords

    Advance pricing agreements; Corporate taxation; Multinational firms; Transfer pricing;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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