When do firms use one set of books in an international tax compliance game?

Rebecca Reineke, Katrin Weiskirchner-Merten, Stefan Wielenberg

Publikation: Working/Discussion PaperWU Working Paper

43 Downloads (Pure)

Abstract

This study examines how a strategic tax auditor affects a multinational firm’s transfer pricing in a tax compliance game. Our model uses a divisionalized firm, in both a low-taxand a high-tax country, that decides to implement a transfer-pricing regime with either one or two sets of books. After observing its unit costs, the firm reports a compliant or non-compliant tax transfer price. In a regime with one set of books, the single transferprice coordinates the quantity decision and determines the tax payments. In a regime with two sets, different transfer prices serve those tasks. In contrast to previous studies, our analysis incorporates a strategic tax auditor, who observes the tax transfer price and decides whether to audit the firm. Real-world regulations suggest larger penalties for detected non-compliance under a two-sets-of-books transfer-pricing regime. Our analysis identifies the mixed strategy equilibria and examines how variations in the tax regulation—the tax rate difference and the penalty difference—affect the firm’s tax aggressiveness. We show that a firm acts less tax aggressively with a higher tax rate difference. Additionally, the model predicts that the firm either increases or decreases the probability of keeping one set of books for a smaller penalty difference.
OriginalspracheEnglisch
ErscheinungsortVienna
HerausgeberWU Vienna University of Economics and Business
DOIs
PublikationsstatusVeröffentlicht - 11 März 2020

Publikationsreihe

ReiheWU International Taxation Research Paper Series
Nummer2017-08

WU Working Paper Reihe

  • WU International Taxation Research Paper Series

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