Working Paper: CEPR ID: DP5952
Authors: Soren Bo Nielsen; Pascalis Raimondosmller; Guttorm Schjelderup
Abstract: We examine how a multinational's choice to centralize or de-centralize its decision structure is affected by country tax differentials. Within a simple model that emphasizes the multiple conflicting roles of transfer prices in MNEs - here, as a strategic pre-commitment device and a tax manipulation instrument - we show that decentralization is preferred in case of small tax differentials, whereas centralization can be more profitable, when tax differentials are large. In essence, the organizational flexibility of MNEs is triggered by the scope for tax minimization. Our analysis allows for both commitment and non-commitment to transfer prices, and for alternative modes of competition.
Keywords: centralized vs decentralized decisions; MNEs; taxes; transfer prices
JEL Codes: F23; H25; L23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tax differentials (H29) | Centralization (H77) |
| Tax differentials (H29) | Decentralization (H77) |
| Absence of tax differentials (H29) | Decentralization (H77) |
| High transfer price (F16) | Centralization (H77) |
| High transfer price (F16) | Market share conflict (L17) |
| Tax differentials influence decision structures (H73) | Organizational structure of MNEs (L22) |