Using a game theoretical setting, this paper studies how a multinational company's (MNC) choice of using one set (OSB) or two sets of books (TSB) is affected by a strategically
acting tax auditor (TA). First, a divisionalized MNC with a producing division in a
low tax country and a selling division in a high tax country chooses either OSB or TSB.
With OSB, the unique transfer price coordinates the quantity decision and determines the tax payments. With TSB, two transfer prices are used for both tasks. Second, a TA may
audit the MNC's transfer prices.
It turns out that the TA's bargaining power and his personal audit costs critically influence
the MNC's transfer pricing decision. For a low bargaining power and low audit costs,
the MNC keeps OSB with positive probability. When the TA's bargaining power is high,
the negotiation benefits from using a single transfer price are outweighed by the costs of
a reduced flexibility. Then, the MNC keeps TSB with either tax aggressive or compliant
reported transfer prices. In addition, a raise in the tax difference induces less tax aggressive
behavior. Intuitively, tax aggressiveness should be even more attractive in this case. This
intuition is not true in our setting since the TA's audit probability increases and, thus, makes
profit shifting less attractive. / Series: WU International Taxation Research Paper Series
| Identifer | oai:union.ndltd.org:VIENNA/oai:epub.wu-wien.ac.at:5720 |
| Date | 07 1900 |
| Creators | Haak, Marcel, Reinecke, Rebecca, Weiskirchner-Merten, Katrin, Wielenberg, Stefan |
| Publisher | WU Vienna University of Economics and Business, Universität Wien |
| Source Sets | Wirtschaftsuniversität Wien |
| Detected Language | English |
| Type | Paper, NonPeerReviewed |
| Format | application/pdf |
| Relation | http://ssrn.com/abstract=3012231, http://epub.wu.ac.at/5720/ |
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