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Sorting into Outsourcing: Are Profits Taxed at a Gorilla's Arm's Lenght?

This article analyzes profit taxation according to the arm's length principle in a new model where heterogeneous firms sort into foreign outsourcing. We show that multinational firms are able to shift profits abroad even if they fully comply with the tax code. This is because, in equilibrium, intra-... Full description

Year of Publication: 2011-09
Authors: Bauer, Christian J.; Langenmayr, Dominika
Institutions: Wirtschafts- und Sozialwissenschaftliche Fakultät, Friedrich-Alexander-Universität
Physical Description: application/pdf
Series: Working Papers / Wirtschafts- und Sozialwissenschaftliche Fakultät, Friedrich-Alexander-Universität
Subjects: outsourcing | profit taxation | transfer pricing | arm's length principle | multinational firms
Classification: jel-F23; jel-F22; jel-H25
Type of Publication: Book / Working Paper
Notes: Number 104 27 pages
Title record from database: RePEc - Research Papers in Economics
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Summary: This article analyzes profit taxation according to the arm's length principle in a new model where heterogeneous firms sort into foreign outsourcing. We show that multinational firms are able to shift profits abroad even if they fully comply with the tax code. This is because, in equilibrium, intra-firm transactions occur in firms that are better than the market at input production. Transfer prices set at market values following the arm's length principle thus systematically exceed multinationals' marginal costs. This allows for a reduction of tax payments with each unit sold. The optimal organization of firms hence provides a new rationale for the empirically observed lower tax burden of multinational corporations.
Item Description: Number 104 27 pages
Physical Description: application/pdf

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