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Who Benefits from Inconsistent Multinational Tax Transfer‐Pricing Rules? *
Author(s) -
Waegenaere Anja,
Sansing Richard C.,
Wielhouwer Jacco L.
Publication year - 2006
Publication title -
contemporary accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.769
H-Index - 99
eISSN - 1911-3846
pISSN - 0823-9150
DOI - 10.1506/c5nj-3d6x-wkbj-v2h8
Subject(s) - transfer pricing , taxpayer , economics , indirect tax , ad valorem tax , tax rate , deferred tax , double taxation , tax credit , audit , value added tax , tax reform , multinational corporation , business , tax avoidance , public economics , microeconomics , state income tax , monetary economics , finance , accounting , gross income , macroeconomics
This paper uses a strategic tax compliance model to examine taxpayer reporting and tax authority audit strategies in an international setting with two tax authorities. The setting features both information asymmetry between the taxpayer and the tax authorities and inconsistent tax transfer‐pricing rules. The latter creates the possibility of each country trying to tax the same income. We study the effect of the probability of transfer‐price rule inconsistency on the strategies and payoffs of the taxpayer and the tax authorities. We find that an increase in the probability of transfer‐price rule inconsistency induces more aggressive auditing by governments. It therefore deters taxpayers from shifting income to the country with the lower tax rate in situations in which the transfer‐pricing rules are consistent, and can either increase or decrease the income reported to the low‐tax‐rate country in cases in which the transfer‐pricing rules are inconsistent. We find that an increase in transfer‐price rule inconsistency could either increase or decrease the taxpayer's expected tax liability and could either increase or decrease the deadweight loss from auditing. Our results call into question the conventional wisdom that the prospect of double taxation due to transfer‐price rule inconsistency increases a firm's expected tax liability and governments' expected audit costs.