Working Paper: CEPR ID: DP2753
Authors: Hans Jarle Kind; Karen Helene Midelfart Knarvik; Guttorm Schjelderup
Abstract: This Paper studies how economic integration affects transfer pricing, tax policy and welfare, when multinationals are taxed either according to formula apportionment (FA) or separate accounting (SA). It is shown that economic integration induces multinationals to lower their transfer prices under both tax systems, but that transfer prices become less tax sensitive under FA than under SA. A main result of the paper is that economic integration lowers tax rates in the Nash equilibrium under SA, but leads to higher taxes in the Nash equilibrium under FA.
Keywords: Economic integration; International tax competition; Multinational enterprises; Tax regimes
JEL Codes: F15; F23; H25; H87
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| economic integration (F15) | lower transfer prices (F16) |
| economic integration (F15) | lower transfer prices under SA (F16) |
| economic integration (F15) | lower tax rates under SA (H25) |
| economic integration (F15) | higher tax rates under FA (H29) |
| economic integration (F15) | intensified tax competition under SA (H26) |
| economic integration (F15) | reduced intensity of tax competition under FA (H29) |
| tax regime (FA) (H25) | lower transfer prices (F16) |
| tax regime (SA) (H25) | lower transfer prices (F16) |