Do Transfer Pricing Rules distort R&D Investment Decisions?

Publikation: Working/Discussion PaperWU Working Paper

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Abstract

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.
OriginalspracheEnglisch
ErscheinungsortVienna
HerausgeberWU Vienna University of Economics and Business
DOIs
PublikationsstatusVeröffentlicht - 2018

Publikationsreihe

ReiheWU International Taxation Research Paper Series
Nummer2018-02

Österreichische Systematik der Wissenschaftszweige (ÖFOS)

  • 502038 Steuerlehre

WU Working Paper Reihe

  • WU International Taxation Research Paper Series

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