Transfer pricing regulation and taxation of royalty payments

Steffen Juranek, Dirk Schindler, Guttorm Schjelderup

Research output: Contribution to journalArticleAcademicpeer-review

13 Citations (Scopus)

Abstract

The digital economy is characterized by the use of intellectual property such as software, patents, and trademarks. The pricing of such intangibles is widely used to shift profits to low-tax countries. We analyze the implications of different OECD methods to regulate transfer pricing and the role of a source tax on royalty payments for abusive transfer pricing. First, we show that under the traditional transfer pricing methods mispricing of royalty payments does not affect investment behavior. In contrast, the Transactional Profit Split Method that is promoted by the OECD for evaluating firms in the digital economy triggers higher investment in order to facilitate higher profit shifting. Second, royalty taxation is effective in reducing (such) abusive profit shifting, but always reduces investment. Third, a royalty tax rate below the corporate tax rate leads to overinvestment in a tax system with allowance for corporate equity (ACE).

Original languageEnglish
Pages (from-to)67-84
Number of pages18
JournalJournal of Public Economic Theory
Volume20
Issue number1
DOIs
Publication statusPublished - Feb 2018
Externally publishedYes

Bibliographical note

Publisher Copyright:
© 2017 Wiley Periodicals, Inc.

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