International Finance Discussion Papers (IFDP)

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October 2017

International Transfer Pricing and Tax Avoidance: Evidence from Linked Trade-Tax Statistics in the UK

Li Liu, Tim Schmidt-Eisenlohr, and Dongxian Guo

Abstract:

This paper employs unique data on export transactions and corporate tax returns of UK multinational firms and finds that firms manipulate their transfer prices to shift profits to lower-taxed destinations. It uncovers three new findings on tax-motivated transfer mispricing in real goods. First, transfer mispricing increases substantially when taxation of foreign profits changes from a worldwide to a territorial approach in the UK, with multinationals shifting more profits into low-tax jurisdictions. Second, transfer mispricing increases with a firm's R&D intensity. Third, tax-motivated transfer mispricing is concentrated in countries that are not tax havens and have low-to-medium-level corporate tax rates.

Keywords: transfer pricing, corporate taxation avoidance, multinational firms

DOI: https://doi.org/10.17016/IFDP.2017.1214

PDF: Full Paper

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Last Update: January 09, 2020