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Taxes and Decision Rights in Multinationals

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  • SØREN BO NIELSEN
  • PASCALIS RAIMONDOS‐MØLLER
  • GUTTORM SCHJELDERUP

Abstract

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.

Suggested Citation

  • Søren Bo Nielsen & Pascalis Raimondos‐Møller & Guttorm Schjelderup, 2008. "Taxes and Decision Rights in Multinationals," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 10(2), pages 245-258, April.
    • Handle: RePEc:bla:jpbect:v:10:y:2008:i:2:p:245-258
    DOI: 10.1111/j.1467-9779.2008.00360.x
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    More about this item

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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