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|کد مقاله||سال انتشار||تعداد صفحات مقاله انگلیسی||ترجمه فارسی|
|17089||2013||13 صفحه PDF||سفارش دهید|
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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of Economics and Business, Volume 65, January–February 2013, Pages 1–13
This paper examines the impacts of the arm's length principle on tax revenues under endogenous location choices. The results show that the level of transfer price depends not only on taxation policies, but also on firms’ location choices. An imposition of the arm's length principle on a multinational enterprise does not raise tax revenues under endogenous location choices. Such a result is in contrast to the common opinion of tax authorities regarding the regulation on transfer pricing.
The trend of increasing globalization in the world economy has created many new multinational enterprises (hereafter, MNEs) and has also increased the amount of cross-border transactions between their affiliates or related companies. Such transactions often involve the issue of transfer pricing. Transfer pricing is the pricing of internal transactions between subsidiaries or related companies, serving as an important device for a MNE to achieve the goal of maximizing global profits. Nevertheless, tax authorities often claim that transfer pricing deprives governments of their fair share of taxes from global enterprises (Neighbour, 2002). They presume that MNEs use transfer pricing policies to shift profits from high-tax rate countries into low-tax rate countries. To avoid the corresponding loss in tax revenues, tax authorities constantly tighten rules to curb transfer price distortions. From the perspectives of maximizing tax revenues, necessary tax codes must be enacted to prevent such quasi tax savings. As a result, most countries have rules or regulations to assess the appropriateness of the transfer prices quoted by MNEs. One way to restrict the use of transfer pricing is via an audit, which follows the arm's length (hereafter AL) transaction principle. The AL principle is the principle associated with a transaction where the affiliates are dealing from an equal bargaining position, neither party is subject to the other's control or dominant influence, and the transaction is treated with fairness and legality. If the transfer price is judged to be significantly different from the arm's length price, then national tax authorities will correct the transfer price accordingly.2 This concept can be found in Article 9 of the OECD Model Tax Convention, which forms the basis of many bilateral tax treaties. Whenever two countries have a treaty in place that contains an Associated Enterprises (or equivalent) Article worded in a manner similar to Article 9 of the OECD Model, that article will be interpreted in line with internationally accepted transfer pricing principles. This says that those principles will set the boundaries for the application of the transfer pricing rules in the domestic legislation of the Contracting States. The same concern regarding regulations on transfer pricing is also found in the U.S. The purpose of Internal Revenue Code (IRC) section 482 is “to ensure that taxpayers clearly reflect income attributable to controlled transactions and to prevent the avoidance of taxes with respect to such [internal] transactions.” The AL regulation of IRC 482 requires the calculation of a firm's transfer pricing to be comparable to a transaction with an independent party. If the transfer price reported by the firm deviates too far from the tax authorities’ expectation, then the firm may face a penalty. The penalty could be either 20% or 40% of the underpaid amount of tax, with a higher penalty applicable when the deviation from the penalty threshold is larger, according to IRC §6662. In some countries like Argentina, the amount of the penalty may be up to 400% of the underpaid tax (Ernst & Young International Ltd, 2012). The AL principle is usually applied by comparing the ‘conditions’ (e.g. price or margin) of a controlled transaction with those of independent transactions. The OECD has set forth a series of accepted methodologies according to Transfer Pricing Guidelines (1995). They are the comparable uncontrolled price (hereafter CUP) method, cost-plus (hereafter CP) method, resale price method, profit split method, and transactional net margin method. Among these methods, the CUP and the CP methods are the two mostly frequently used regulation rules (Ernst & Young International Ltd, 2010). Under CUP, the tax authorities constrain the MNEs to set their transfer prices to the price of a comparable uncontrolled transaction with an independent firm. On the other hand, under CP the tax authorities compute the transfer price by applying an ‘appropriate’ margin to the cost of MNEs. The CUP method is equivalent to the CP method in a competitive market, because the price of an independent firm selling locally as the comparable uncontrolled price and the average mark-ups of firms selling locally as the cost plus mark-up are the same. Under this situation the OECD transfer pricing rules can be studied under the same framework. The AL principle is usually translated into marginal cost pricing in the literature (Kind et al., 2005 and Peralta et al., 2006). This is because in order to detect deviations from AL pricing in practice, tax authorities test whether a transfer price meets the AL standard by comparing data from the audited firm to data from comparable transactions between independent buying and selling firms. The general idea is that as long as the audited firm cannot influence the comparable transactions, then the data from either the CUP or the CP method should approximate the independent price of a competitive market. This situation implies that in a competitive market the AL principle can be proxied by marginal cost pricing. In the literature of international transfer pricing it is well known that a MNE facing different national tax rates can potentially shift profits to low-tax countries by manipulating transfer prices on intra-firm traded goods; see e.g. Copithorne (1971) and Horst (1971). There are two crucial assumptions in the literature on transfer pricing: First, a MNE's price or quantity decision is made without any explicit geographical consideration; second, a MNE directly exercises monopoly power in local markets. However, in the real world many MNEs delegate decision-making, such as output or price decisions, to their subsidiaries based on locational comparative advantages. For example, in the car industry the headquarters of the MNE often determines the export prices of cars, but delegates decisions about the final price of them to its subsidiaries in their respective countries. This means that MNEs usually face oligopoly competition in many local markets. Under this situation, a study of how to compete strategically with a local rival is quite important. Such a strategic consideration is often ignored by the international accounting literature, whereby a MNE is most often assumed to have the perfect ability to reap monopoly profits due to a lack of viable competition. However, under a pure oligopoly, Schjelderup and Sogard (1997) and Nielsen, Raimondos-Moller, and Schjelderup (2003) show that transfer pricing can be used as a strategic device when a MNE delegates decisions about product prices (or quantities) to its affiliates. Alles and Datar, 1998 and Gabrielsen and Schjelderup, 1999 and Zhao (2000) study the strategic role of transfer price in decentralized oligopolistic settings. In particular, Alles and Datar (1998) develop a model where two oligopolistic firms strategically select their cost-based transfer prices in a spatial space. Product prices in their model are based on firms’ transfer prices, which communicate manufacturing costs to marketing divisions. It is for this reason that transfer prices are a strategic component to both firms. However, in their model the locations of the firms are given exogenously and the method of pricing is cost-based transfer pricing. Note that in the absence of an established market price many companies base the transfer price on the production cost of the supplying division. The study of Alles and Datar (1998) belongs to such a case. While the reliance on the AL principle is usually supported by the assumption of perfect competition in the related market, it apparently restricts MNEs’ pricing strategies and may thus hurt their global profit accumulation. This may in turn reduce the tax authorities’ fiscal revenues. The present study analyzes whether the imposition of the AL principle on MNEs affects their incentives for relocation in the downstream market, and may in turn affect the authorities’ fiscal revenues of taxing MNEs’ profits. Two points can be thus addressed: (1) Does the AL regulation raise authorities’ tax revenues? (2) What are the impacts of transfer pricing on firms’ location choices if they face different corporate tax rates? I present a multi-stage model in which firms have to take into account spatial competition and the effects of taxation. In the model, duopolist suppliers (MNEs) of a variable input sell to their downstream producers using the input in the production of a final good. These downstream producers compete as Bertrand duopolists in the final product market. Two games regarding the input market are considered. Under a regulation game, the arm's length rule is enforced so that the MNEs are asked to quote their transfer price according to the input price of the external market. Under an unregulated game, the MNEs are free to set transfer prices for maximizing their global profits. The results show that the transfer price level may depend not only on taxation policies, but also on firms’ location choices. The paper is organized as follows. Section 2 sets up the model and then solves the related issues. Section 3 concludes the paper.
نتیجه گیری انگلیسی
Transfer pricing in this paper plays a strategic role when a multinational enterprise (MNE) intends to maximize global profits under endogenous location choices. A MNE can strategically manipulate transfer pricing in order to help its downstream subsidiary gain greater market share. This suggests that a MNE's location choice and transfer price may depend not only on taxation policies, but also on competitive influences from other MNEs. The current paper's result shows that if the downstream firms have different constant marginal costs of production, then the MNEs have incentives to charge the low-cost downstream firm a higher transfer price. A MNE's decision regarding where to locate its downstream firms hinges on the relative level of the corporate tax rates in the respective country. A MNE suffering from the heavy burden of a corporate tax has incentives to locate its downstream firm towards the market center. Furthermore, the enforcement of the arm's length (AL) principle on MNEs’ internal transactions reduces location differentials, compared to no regulation on transfer pricing. This leads to lower mill prices and lower profits in equilibrium. I thus find that the imposition of the AL principle does not raise tax revenues under endogenous location choices. Such a result is in contrast to the common opinion of tax authorities regarding the regulation on transfer pricing. Finally, this paper's purpose is not to render a model that is realistic in all respects, but rather to examine the natural role of the AL regulation on authorities’ tax revenues and MNEs’ location choices (with welfare consideration). In order to facilitate analytical tractability, assumptions regarding the input pricing mechanism and demand for the final product have been made as simple as possible, with perfect information and costless verifiability of the multinational firm's marginal cost. Consequently, the appearance of the transfer price effect makes location differentials greater. The effect should be also robust to a number of modifications to the vertical-integrated spatial model.