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Do Transfer Pricing Rules distort R&D Investment Decisions?

This study analyzes the impact of transfer pricing on multinational enterprises' R&D investment decisions. Specifically, I examine the effects of two commonly used contract designs to exchange and develop intangible assets across group affiliates: licensing and cost sharing agreements. Whilst serving as a tool to allocate taxable income between group affiliates, the economic implications of licensing and cost sharing agreements differ. Whereas licensing agreements provide for a sharing rule on the intangible's profits, cost sharing agreements on the other hand provide a sharing rule on R&D development costs. This difference matters when firms simultaneously use internal transfer prices to allocate taxable income and provide local management with sufficient investment incentives. Using a multiple-agent, moral hazard investment framework I model a multinational firm with comparable group affiliates in two countries that delegates the R&D investment decision to a local risk and effort averse affiliate manager. The results suggest that the optimal contract not only depends on available tax benefits, but also on R&D investment and manager specific characteristics. A licensing agreement provides management with larger incentives to invest in R&D mitigating agency concerns associated with R&D. On the other hand, using a cost sharing agreement the firm can cater different risk preferences among managers potentially increasing investment. The arm's length principle however may distort an efficient allocation of R&D costs when using a cost sharing agreement. / Series: WU International Taxation Research Paper Series

Identiferoai:union.ndltd.org:VIENNA/oai:epub.wu-wien.ac.at:6057
Date02 February 2018
CreatorsBornemann, Tobias
PublisherWU Vienna University of Economics and Business, Universität Wien
Source SetsWirtschaftsuniversität Wien
LanguageEnglish
Detected LanguageEnglish
TypePaper, NonPeerReviewed
Formatapplication/pdf
Relationhttps://papers.ssrn.com/sol3/papers.cfm?abstract_id=3114071, http://epub.wu.ac.at/6057/

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