Transfer Pricing by Multinational Firms: New Evidence from Foreign Firm Ownerships

TLDR

Our triple‑difference estimations exploit changes in export unit values following foreign affiliate acquisitions and statutory corporate tax rate shifts, correcting for downward bias from firms adjusting arm’s‑length prices to conceal transfer‑price manipulation. The study finds that Danish multinationals reduce export unit values to low‑tax countries by 5.7–9.1 %, leading to a tax revenue loss of 3.24 % of their tax returns. JEL codes: D21, D22, F14, F23, H25, H32.

Abstract

Using a firm-level dataset of Danish exports between 1999–2006, we find robust evidence for profit shifting by multinational corporations. Our triple difference estimations exploit the response of export unit values to acquisitions of foreign affiliates and to changes in statutory corporate tax rates. This identification strategy corrects for a downward bias resulting from firms adjusting arm's length prices to obscure transfer price manipulations. We find that Danish multinationals reduce the unit values of their exports to low tax countries between 5.7 to 9.1 percent. This difference corresponds to a tax revenue loss of 3.24 percent of Danish multinationals' tax returns. (JEL D21, D22, F14, F23, H25, H32)