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Transfer Pricing and Strategic Taxation of Globally Joint Inputs
Author(s) -
Konan Denise Eby
Publication year - 1996
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/j.1467-9396.1996.tb00096.x
Subject(s) - transfer pricing , multinational corporation , economics , international taxation , double taxation , microeconomics , tax rate , tax credit , monetary economics , tax reform , international economics , public economics , finance
This paper models strategic taxation policy of home and host governments when a multinational enterprise sets transfer prices on globally joint inputs such as research and development. Tax credit and deduction allowances, as well as no taxation of foreign‐earned profits, result in identical optimal transfer‐price solutions and national income effects in both countries. An equilibrium home‐tax solution is to tax foreign‐earned profits at a higher rate than domestically earned profits. The multiantional responds by shifting profits abroad through transfer‐pricing mechanisms.