Conflicting Transfer Pricing Incentives and the Role of Coordination

TLDR

The study evaluates how government and firm‑level coordination affects transfer prices of U.S. multinational corporations when income taxes and duties cannot be jointly minimized, and documents the influence of coordination on their tax‑reporting behavior. The authors document, in a specific setting, how coordination between income tax and customs functions alters MNCs’ tax‑reporting behavior.

Abstract

Abstract Our study evaluates the role of coordination, at both the government and the firm level, on the transfer prices set by U.S. multinational corporations ( MNC s) when income taxes and duties cannot be jointly minimized with a single transfer price. We find that either the presence of a coordinated income tax and customs enforcement regime or coordination between the income tax and customs functions alters transfer prices for these firms. Our analyses have implications for both firms and taxing authorities. Specifically, our findings suggest that MNC s might decrease their aggregate tax burdens by increasing coordination within the firm or that governments might increase their aggregate revenues by improving coordinating enforcement across taxing authorities. Our study is novel in that we document, in a specific setting, how coordination influences MNC s’ tax reporting behavior.