Do Transfer Pricing Laws Limit International Income Shifting? Evidence from European Multinationals

By T. Lohse, Nadine Riedel. Social Science Research Network, 2013

137 citations recorded by the source corpus.

In recent years several countries have augmented their national tax laws by transfer pricing legislations which intend to limit the leeway of multinational firms to exploit international corporate tax rate differences and relocate profit to low-tax affiliates by distorting intra-firm transfer prices. The aim of this paper is to empirically investigate whether these laws are instrumental in restricting shifting behaviour. To do so, we exploit unique information on the scope and evolution of national transfer pricing laws and link it with panel data on European multinationals. In line with previous studies, we find evidence for tax-motivated profit shifting. The analysis further suggests that transfer pricing rules significantly reduce shifting activities. The effect is economically relevant, suggesting that the legislations may be socially desirable despite the high administrative burden they impose on firms and tax authorities.

Subfields: Accounting, Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/79f1a70f9b236fea0c41b6e6aeb3bb15f89b2ac6

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In Accounting

1. Ruud A. De Mooij
2. Li Liu
3. Sebastian Beer
4. Dhammika Dharmapala
5. Michelle Hanlon
6. Jost H. Heckemeyer

In Economics and Econometrics

1. Ruud A. De Mooij
2. Li Liu
3. Sebastian Beer
4. Dhammika Dharmapala
5. Michelle Hanlon
6. Jost H. Heckemeyer

Citations in the corpus

• What Do We Know About Base Erosion and Profit Shifting? A Review of the Empirical Literature (2014, methodology): “Lohse and Riedel (2013) use a more recent panel of Amadeus data (over 1999-2009) and find a semi-elasticity of about 0.4 – i.e. a 10 percentage point increase in the tax rate differential between an affiliate and its parent is associated with a 4% increase in profits reported by that affiliate.”
• INTERNATIONAL CORPORATE TAX AVOIDANCE: A REVIEW OF THE CHANNELS, MAGNITUDES, AND BLIND SPOTS (2018, background): “Their effectiveness in curbing international tax avoidance is supported in two concurrent studies, which show that introduction and tightening of transfer pricing rules can diminish the tax sensitivity of corporate profits by 50% (Riedel et al., 2015), though with much weaker effects for firms with ”