Tax and tariff planning through transfer prices: The role of the head-office and business unit

Saskia Kohlhase, Jacco L. Wielhouwer

Research output: Contribution to journalArticleAcademicpeer-review

2 Citations (Scopus)

Abstract

We study the roles of the head office (HO) and the business units (BUs) of a multinational corporation (MNC) in reducing income tax and tariff payments through internal transfer prices in international trades. Using confidential transfer price data of a large MNC, we analyze how the different elements of internal transfer prices set by the HO and BUs vary differently from external prices with income tax rates, tariff rates, and the tradeoff between the two. Absent severe agency conflicts, we find that the BUs contribute more to tax planning than the HO, despite that explicit incentives to do so are not included in the compensation schemes. The roles of the HO and BUs vary with product market competition, the risk of conflicts with tax and customs authorities, and agency problems within the firm. Moreover, we provide evidence of strategic trade cost allocations among BUs to reduce income taxes.
Original languageEnglish
Article number101568
JournalJournal of Accounting and Economics
Volume75
Issue number2-3
DOIs
Publication statusPublished - 1 Apr 2023

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