Asymmetric Taxation of Profits and Losses and its Influence on Investment Timing: Paradoxical Effects of Tax Increases

Mehrmann, Annika; Schneider, Georg; Sureth, Caren

doi:10.2139/ssrn.2111475

Cited by 2 publications

(1 citation statement)

References 61 publications

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“…Rents and investment outlays are allocated proportionally keeping the tax system neutral to investment decisions. On the other hand previous research has identified several features of tax systems that impede tax neutrality such as depreciation rules, loss-offset restrictions or negative effects on alternative investments (Mehrmann, Schneider, and Sureth-Sloane, 2012;Niemann and Sureth, 2013). To analyze the repercussions of licensing and cost sharing agreements on R&D invest-ments and the firm's choice of optimal contract design, I use a moral-hazard investment framework with multiple agents.…”

Section: Optimal Contract With Imperfect Informationmentioning

confidence: 99%

Do Transfer Pricing Rules Distort R&D Investment Decisions?

Bornemann

2018

SSRN Journal

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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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Section: Optimal Contract With Imperfect Informationmentioning

confidence: 99%

Do Transfer Pricing Rules Distort R&D Investment Decisions?

Bornemann

2018

SSRN Journal

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Investment Effects of Wealth Taxes Under Uncertainty and Irreversibility

Niemann

Sureth-Sloane

2015

SSRN Journal

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The growing dissatisfaction with perceived distributional inequality and budgetary constraints gave rise to a discussion on the (re-)introduction of wealth taxes. Wealth taxes are typically levied on private wealth, in some countries also on corporate wealth. To avoid misleading statements concerning possible distributional consequences of wealth taxes, preceding analyses of the economic and particularly investment e¤ects are necessary. As investments drive job creation, tax-induced changes in investment timing may signi…-cantly a¤ect the income and wealth distribution. We analyze the impact of wealth taxes on investment timing under uncertainty and irreversibility and the propensity to carry out risky projects. Using a Dixit/Pindyck type real options model we …nd that wealth taxes have real e¤ects. This means that higher wealth tax rates can either stimulate or depress the propensity to invest in risky projects. We …nd that apparently paradoxical wealth tax e¤ects (accelerated investment due to higher wealth tax rates) are more likely for low interest rates and for high-risk investments. Using either historical cost or fair value accounting may a¤ect investment timing ambiguously. Thus, the design of wealth taxes is crucial for the resulting delay or acceleration of investment. Although our model takes an individual perspective, our …ndings are also relevant for the current tax policy discussion on the introduction of wealth taxes. Our results indicate that wealth taxes are particularly harmful for speci…c classes of investments, for example low-risk investments.JEL classi…cation: H25; H21

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Asymmetric Taxation of Profits and Losses and its Influence on Investment Timing: Paradoxical Effects of Tax Increases

Cited by 2 publications

References 61 publications

Do Transfer Pricing Rules Distort R&D Investment Decisions?

Do Transfer Pricing Rules Distort R&D Investment Decisions?

Investment Effects of Wealth Taxes Under Uncertainty and Irreversibility

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