Quotation Bornemann, Tobias. 2018. Do Transfer Pricing Rules distort R&D Investment Decisions?


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Abstract

This study analyzes the impact of transfer pricing on multinational enterprises’ R&D investment decisions. Specifically, I examine the effects of two commonly used contract designs to exchange and develop intangible assets across group affiliates: licensing and cost sharing agreements. Whilst serving as a tool to allocate taxable income between group affiliates, the economic implications of licensing and cost sharing agreements differ. Whereas licensing agreements provide for a sharing rule on the intangible’s profits, cost sharing agreements on the other hand provide a sharing rule on R&D development costs. This difference matters when firms simultaneously use internal transfer prices to allocate taxable income and provide local management with sufficient investment incentives. Using a multiple-agent, moral hazard investment framework I model a multinational firm with comparable group affiliates in two countries that delegates the R&D investment decision to a local risk and effort averse affiliate manager. The results suggest that the optimal contract not only depends on available tax benefits, but also on R&D investment and manager specific characteristics. A licensing agreement provides management with larger incentives to invest in R&D mitigating agency concerns associated with R&D. On the other hand, using a cost sharing agreement the firm can cater different risk preferences among managers potentially increasing investment. The arm’s length principle however may distort an efficient allocation of R&D costs when using a cost sharing agreement.

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Publication's profile

Status of publication Published
Affiliation WU
Type of publication Working/discussion paper, preprint
Language English
Title Do Transfer Pricing Rules distort R&D Investment Decisions?
Year 2018
URL https://ssrn.com/abstract=3114071

Associations

People
Bornemann, Tobias (Details)
Organization
Business Taxation Group AB (Details)
Research areas (ÖSTAT Classification 'Statistik Austria')
5300 Economics (Details)
5349 Business taxation (Details)
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