Taxes and Decision Rights in Multinationals

We examine how a multinational's choice to centralize or decentralize its decision structure is affected by country tax differentials. Within a simple model that emphasizes the multiple conflicting roles of transfer prices in multinational enterprises (MNEs)—here, as a strategic precommitment d...

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Bibliographic Details
Published in:Journal of public economic theory 2008-04, Vol.10 (2), p.245-258
Main Authors: BO NIELSEN, SØREN, RAIMONDOS-MØLLER, PASCALIS, SCHJELDERUP, GUTTORM
Format: Article
Language:English
Subjects:
Corporate taxes
Decentralization
Economic theory
Favoritism
Multinational corporations
Studies
Transfer pricing
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Summary:We examine how a multinational's choice to centralize or decentralize its decision structure is affected by country tax differentials. Within a simple model that emphasizes the multiple conflicting roles of transfer prices in multinational enterprises (MNEs)—here, as a strategic precommitment device and a tax manipulation instrument—we show that centralization is more profitable when tax differentials are large. When tax differentials are small, decentralization can be performed in two different ways each providing the highest profits in a particular range of the tax differential. Hence, the paper emphasizes the organizational flexibility that MNEs have in pursuing tax optimization.
ISSN:1097-3923
1467-9779
DOI:10.1111/j.1467-9779.2008.00360.x