The role of transfer prices in profit-shifting by U.S. multinational firms: Evidence from the 2004 Homeland Investment Act

Flaaen, Aaron (2017) The role of transfer prices in profit-shifting by U.S. multinational firms: Evidence from the 2004 Homeland Investment Act. Centre for Business Taxation Working Paper, Oxford.

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Abstract

Using unique transaction-level microdata, this paper documents profit-shifting behavior by U.S.multinational firms via the strategic transfer pricing of intra-firm trade. A simple model reveals how differences in tax rates, both the corporate tax rates across countries and the dividend repatriation tax rate over time, affect the worldwide profit-maximizing transfer-prices set by firms for intra-firm exports and imports. I test the predictions of the model in the context of the 2004 Homeland Investment Act (HIA), a one-time tax repatriation holiday which generated a discreet change in the incentives for U.S. firms to shift profits to low-tax jurisdictions. Matching individual trade transactions by firm, product, country, mode-of-transport, and month across arms-length and related-party transactions { following Bernard, Jensen, and Schott (2006) -
yields a measure of the transfer-price wedge at a point in time. A difference-in-difference strategy reveals that this wedge responds as predicted by the model: In the period following passage of the HIA, the export transfer price wedge increased in low-tax relative to high-tax countries, while the import transfer price wedge exhibited the opposite behavior. Consistent with the form of tax avoidance known as "round-tripping", the results imply $6 billion USD of under-reported U.S. exports, nearly $7 billion USD of over-reported U.S. imports, and roughly $2 billion USD in foregone U.S. corporate tax receipts.

Item Type: Other Working Paper
Keywords: Oxford University Centre for Business, Profit-Shifting, Transfer Prices, Intra-firm Trade, Corporate Taxes
Subject(s): Taxation
Centre: Oxford University Centre for Business Taxation > CBT Working Papers
Date Deposited: 08 Feb 2019 13:01
Last Modified: 08 Feb 2019 13:01
Funders: n/a
URI: http://eureka.sbs.ox.ac.uk/id/eprint/7289

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