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Taxes and Decision Rights in Multinationals
Author(s) -
BO NIELSEN SØREN,
RAIMONDOSMØLLER PASCALIS,
SCHJELDERUP GUTTORM
Publication year - 2008
Publication title -
journal of public economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.809
H-Index - 32
eISSN - 1467-9779
pISSN - 1097-3923
DOI - 10.1111/j.1467-9779.2008.00360.x
Subject(s) - multinational corporation , flexibility (engineering) , precommitment , economics , decentralization , microeconomics , differential (mechanical device) , industrial organization , business , market economy , finance , aerospace engineering , management , engineering
We examine how a multinational's choice to centralize or decentralize its decision structure is affected by country tax differentials. Within a simple model that emphasizes the multiple conflicting roles of transfer prices in multinational enterprises (MNEs)—here, as a strategic precommitment device and a tax manipulation instrument—we show that centralization is more profitable when tax differentials are large. When tax differentials are small, decentralization can be performed in two different ways each providing the highest profits in a particular range of the tax differential. Hence, the paper emphasizes the organizational flexibility that MNEs have in pursuing tax optimization.