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Transfer pricing manipulation, tax penalty cost and the impact of foreign profit taxation

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  • Rathke, Alex

Abstract

This paper analyzes the optimal level of transfer pricing manipulation when the expected tax penalty is a function of the tax enforcement and the market price parameter. The arm’s length principle implies the existence of a range of acceptable prices shaped by market, and firms can manipulate transfer prices more freely if market price range is wide, or if its delimitations are difficult to determine. Home taxation of foreign profits can reduce income shifting incentive, depending on the portion of repatriation for tax purposes. We find that the limited tax credit rule tends to be a less efficient measure, nonetheless it is the most widely adopted rule by countries, so to spark the perspective of more powerful approaches for taxation of foreign profits.

Suggested Citation

  • Rathke, Alex, 2015. "Transfer pricing manipulation, tax penalty cost and the impact of foreign profit taxation," MPRA Paper 66133, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:66133
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    References listed on IDEAS

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    Cited by:

    1. Andrea Lassmann & Benedikt Marian Maximilian Zoller-Rydzek, 2019. "Decomposing the Margins of Transfer Pricing," KOF Working papers 19-450, KOF Swiss Economic Institute, ETH Zurich.

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    More about this item

    Keywords

    income shifting; transfer pricing manipulation; tax penalty cost; foreign profit taxation; tax enforcement; arm’s length principle.;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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