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Economic Integration and Agglomeration of Multinational Production with Transfer Pricing

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  • Kato, Hayato
  • Okoshi, Hirofumi
Abstract
Do low corporate taxes always favor multinational production over economic integration? We propose a two-country model in which multinationals choose the locations of production plants and foreign distribution affiliates and shift profits between them through transfer prices. With high trade costs, plants are concentrated in the low-tax country; surprisingly, this pattern reverses with low trade costs. Indeed, economic integration has a non-monotonic impact: falling trade costs first decreases and then increases the plant share in the high-tax country, which we empirically confirm. Moreover, allowing for transfer pricing makes tax competition tougher and international coordination on transfer-pricing regulation can be beneficial.

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  • Kato, Hayato & Okoshi, Hirofumi, 2022. "Economic Integration and Agglomeration of Multinational Production with Transfer Pricing," MPRA Paper 111439, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:111439
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    15. Kristian Behrens & Susana Peralt & Pierre M. Picard, 2014. "Transfer Pricing Rules, OECD Guidelines, and Market Distortions," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 16(4), pages 650-680, August.
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    More about this item

    Keywords

    Profit shifting; Multinational firms; Intra-firm trade; Trade costs; Foreign direct investment (FDI);
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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