Transfer Pricing and Location of Intangibles - Spillover and Tax Avoidance through Profit Shifting

Publication: Working/Discussion PaperWU Working Paper

Abstract

This study examines how spillovers affect a multinational company's choice of an intangible's location and the corresponding transfer price for using this intangible. Our model uses a company with a domestic division in a high-tax country and a foreign division in a low-tax country, where each division's activities generate spillovers on the other division's income. In contrast to previous studies, our analysis incorporates an intangible's optimal location when the company trades off tax minimization and efficient activities. By locating the intangible abroad, the company reduces its tax liability, whereas locating the intangible domestically yields more efficient domestic division activities. For a high spillover of the domestic division, the company locates the intangible domestically. Our model supports empirical evidence regarding intangibles' location that is interpreted as “home bias”. Additionally, we show how variations in regulatory parameters—arm's length range and tax rate differential—affect the divisions' activities and the intangible's location.
Original languageEnglish
Place of PublicationVienna
PublisherWU Vienna University of Economics and Business
Publication statusPublished - 1 Dec 2018

Publication series

NameWU International Taxation Research Paper Series
No.2019-01

WU Working Paper Series

  • WU International Taxation Research Paper Series

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