TRANSFER PRICING OR FORMULAAPPORTIONMENT? TAX-INDUCED DISTORTIONSOF MULTINATIONALS´ INVESTMENT ANDPRODUCTION DECISIONS

For mitigating the problems of transfer pricing formula apportionment (FA) is discussedintensively. However, FA could even be more harmful than transfer pricing because incomeshifting would require changing economic decisions instead of just taking advantage ofaccounting options. We analyze the impact of different international tax allocation regimes ona corporate group´s investment and production decisions. We show that FA offsets theadvantages of decision decentralization as it reverses the separation of responsibilities. It isnot clear whether FA is desirable from a fiscal or an entrepreneurial perspective. The effectsof FA compared to transfer pricing depend strongly on the parameter setting underconsideration, especially the decision procedure within corporate groups.