Experimental Evidence on Transfer Pricing

Open access


We use incentivized economics experiments to test both the point predictions and comparative static predictions of optimal transfer pricing models, comparing behavior under varying conditions, including wholly versus partially-owned subsidiaries and different tariff and tax rates. As predicted, we find that transfer prices are responsive to relative tax and tariff rates as well as ownership proportions. Additionally, we examine convergence and learning in this setting. While individuals do not choose optimal transfer prices, their choices converge to optimal levels with experience. This paper thus makes two important contributions. First, by comparing behavior with theoretical predictions it provides evidence of whether (and when) individuals set transfer prices optimally. Second, by comparing behavior under conditions of full and partial ownership it provides evidence on the impact of policy interventions (like regulating ownership proportions by MNEs) on tax revenues.

If the inline PDF is not rendering correctly, you can download the PDF file here.

  • Abdallah W. M. (1989) International Transfer Pricing Policies: Decision-Making Guidelines for Multinational Companies Westport Connecticut Quorum Books.

  • Avila M. Ronen J. (1999) Transfer-Pricing Mechanisms: An Experimental Investigation International Journal of Industrial Organization17 (5) pp. 689–715.

  • Associated Press How Do Foreign Tax Havens Work? Dallas Morning News May 7 2009 p. 15A.

  • Beer S. Loeprick J. (2015) Profit shifting: drivers of transfer (mis) pricing and the potential of counter measures International Tax and Public Finance 22 (3) pp. 426–451.

  • Benjamin D. J. Sebastian B. (2006) Who is “Behavioral? Cognitive Ability and Anomalous Preferences” NBER Working Paper.

  • Bernard A. B. Bradford J. Schott P. K. (2006) Importers Exporters and Multinationals: A Portrait of Firms in the U. S. that Trade Goods NBER Working Paper.

  • Camfferman K. Cooke T. E. (2004) The Profits of the Dutch East India Company’s Japan Trade Abacus 40 (1) pp. 49–75.

  • Casari M. Ham J. C. Kagel J. H. (2007) Selection Bias Demographic Effects and Ability Effects in Common Value Auction Experiments The American Economic Review 97 (4) pp. 1278–1304.

  • Chalos P. Haka S. (1990) Transfer Pricing under Bilateral Bargaining Accounting Review 65 (3) pp. 624–41.

  • Clausing K. A. (2003) Tax-Motivated Transfer Pricing and US Intrafirm Trade Prices Journal of Public Economics 87 (9) pp. 2207–2223.

  • Collins J. Kemsley D. Lang M. (1998) Cross-Jurisdictional Income Shifting and Earnings Valuation Journal of Accounting Research 36 (3) pp. 209–229.

  • Dejong V. D. Forsythe R. Kim J. Uecker W. C. (1999) A Laboratory Investigation of Alternative Transfer Pricing Mechanisms Accounting Organizations and Society 14 pp. 41–64.

  • Desai M. A. Foley C. F. Hines J. R. (2006) The demand for tax haven operations Journal of Public Economics 90 (3) pp. 513–531.

  • Dharmapala D. Riedel N. (2013) Earning shocks and tax-motivated income-shifting: Evidence from European multinationals Journal of Public Economics 97 pp. 95–107.

  • Eden L. (1983) Transfer pricing policies under tariff barriers Canadian Journal of Economics 16 (4) pp. 669–685.

  • Eden L. Rugman A. M. (1985) The Microeconomics of Transfer Pricing Multinationals and Transfer Pricing New York St. Martin’s Press pp. 13–46.

  • Eden L. (1998) Taxing Multinationals: Transfer Pricing and Corporate Income Taxation in North America Toronto University of Toronto Press.

  • Frederick S. (2005) Cognitive Reflection and Decision Making The Journal of Economic Perspectives 19 (4) pp. 25–42.

  • Gabrielsen T. S. Schjelderup G. (1999) Transfer Pricing and Ownership Structure Scandinavian Journal of Economics 10 (4) pp. 673–88.

  • Gould J. R. (1964) Internal Pricing in Firms when There are Costs of Using an Outside Market Journal of Business 37 (1) pp. 61–67.

  • Grant R. Grantley T. Roman L. (2013) Determinants of transfer pricing aggressiveness: Empirical evidence from Australian firms Journal of Contemporary Accounting & Economics 9 pp. 136–150.

  • Hirshleifer J. (1956) On the Economics of Transfer Pricing Journal of Business 29 (3) pp. 172–184.

  • Hirshleifer J. (1957) Economics of the Divisionalized Firm Journal of Business 30 (2) pp. 96–108.

  • Grubert H. Mutti J. (1991) Taxes Tariffs and Transfer Pricing in Multinational Corporate Decision Making Review of Economics and Statistics 73 (2) pp. 285–93.

  • Hines J. R. Rice E. M. (1994) Fiscal Paradise: Foreign Tax Havens and American Business Quarterly Journal of Economics 109 (1) pp. 49–82.

  • Horst T. (1971) Theory of the Multinational Firm: Optimal Behavior under Differing Tariff and Tax Rates Journal of Political Economy 79 (5) pp. 1059–1072.

  • Horst T. (1973) The simple analytics of multinational firm behaviour in: M. B. Connoly A. K. Swoboda (eds.) International Trade and Money George Allen and Unwin London pp. 72–84.

  • Kachelmeier S. J. Towry K. L. (2002) Negotiated Transfer Pricing: Is Fairness Easier Said than Done? The Accounting Review 77 pp. 571–593.

  • Kant C. (1998) Foreign Subsidiary Transfer Pricing and Tariffs Southern Economic Journal 55 (1) pp. 162–170.

  • Mataloni R. J. Jr. Fahim-Nader M. (1996) Operations of U. S. multinational companies: preliminary results from the 1994 benchmark survey Survey of Current Business 76 (12) pp. 11–37.

  • Moore D. A. Healy P. J. (2008) The Trouble with Overconfidence Psychological Review 115 (2) pp. 502–517.

  • Sheppard L. (2010) Transfer Pricing as Tax Avoidance available at: http://www.forbes.com/2010/06/24/tax-finance-multinational-economics-opinions-columnists-lee-sheppard.html?boxes=Homepagechannels

  • Silverman J. Gracon T. B. Houston D. (2008) Improving Transfer Pricing Risk Management in High-Technology Companies KPMG White Paper 2nd edition.

  • Su J. (2016) France Wants Google To Pay $ 1.8 Billion in Back Taxes: Reports Forbes (Feb. 24).

  • Tang R. (1994) Transfer Pricing in the 1990 s The United Nations Library on Transnational Corporations: Transfer Pricing and Taxation Routledge.

  • Tang R. Y. W. (1997) Intrafirm Trade and Global Transfer Pricing Regulations Westport Connecticut Quorum Books.

  • United Nations Conference on Trade and Development (1999) Transfer Pricing. New York and Geneva: United Nations.

  • U. S. Census Bureau News. (2010) U. S. Department of Commerce Washington D. C.

Journal information
All Time Past Year Past 30 Days
Abstract Views 0 0 0
Full Text Views 758 404 19
PDF Downloads 419 248 13