TY - JOUR
T1 - Tax and tariff planning through transfer prices: The role of the head-office and business unit
AU - Kohlhase, Saskia
AU - Wielhouwer, Jacco L.
N1 - Publisher Copyright:
© 2022 The Authors
PY - 2023/4/1
Y1 - 2023/4/1
N2 - 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.
AB - 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.
UR - http://www.scopus.com/inward/record.url?scp=85143118783&partnerID=8YFLogxK
U2 - 10.1016/j.jacceco.2022.101568
DO - 10.1016/j.jacceco.2022.101568
M3 - Article
SN - 0165-4101
VL - 75
JO - Journal of Accounting and Economics
JF - Journal of Accounting and Economics
IS - 2-3
M1 - 101568
ER -