Is Consistency the Panacea? Inconsistent or Consistent Tax Transfer Prices with Strategic Taxpayer and Tax Authority Behavior

Markus Diller, Johannes Lorenz, Thomas Georg Schneider, Caren Sureth-Sloane

Publication: Working/Discussion PaperWU Working Paper

Abstract

This study investigates how strategic tax transfer pricing of a multinational company (MNC) and two tax authorities in different countries affects production and tax avoidance decisions at the firm level and tax revenues at the country level. We employ a game-theoretical model to analyze the costs and benefits of two tax transfer pricing regimes (consistency vs. inconsistency) under asymmetric information. Though tax transfer pricing harmonization is considered a promising instrument to fight undesired tax avoidance, the implications are largely unclear. We find tax avoidance in equilibrium in both countries under inconsistency. Surprisingly, we identify conditions under which low-tax countries benefit from consistency while high-tax countries benefit from inconsistency. This explains how the strategic interaction of taxpayer and tax authorities under firm-level heterogeneity challenges the implementation of consistent regimes. Understanding the implications of (in)consistent transfer pricing rules is crucial when reforming transfer pricing regulations to fight tax avoidance and double taxation.
Original languageEnglish
Place of PublicationVienna
PublisherWU Vienna University of Economics and Business
Publication statusPublished - 29 Jul 2021

Publication series

NameWU International Taxation Research Paper Series
No.2021-05

WU Working Paper Series

  • WU International Taxation Research Paper Series

Cite this