Transfer Pricing: Strategies, Practices, and Tax Minimization

Klassen, Kenneth J.; Lisowsky, Petro; Mescall, Devan

doi:10.1111/1911-3846.12239

Cited by 128 publications

(61 citation statements)

References 84 publications

Supporting

Mentioning

Contrasting

Unclassified

Order By: Relevance

“…So, we also consider Int'l to increase the expected future cash flows from transfer pricing activities. Klassen et al () found evidence that tax directors with greater transfer pricing experience are correlated with a lower effective tax rate. We operationalize the target's previous experience as part of a multinational group with Int'l , equal to one if the target's nation and the nation of the ultimate parent of the target prior to the acquisition are not the same, and equal to zero otherwise…”

Section: Tests Of the Hypothesesmentioning

confidence: 99%

How Does Transfer Pricing Risk Affect Premiums in Cross‐Border Mergers and Acquisitions?

Mescall

Klassen

2018

Contemporary Accting Res

Self Cite

View full text Add to dashboard Cite

This study investigates how transfer pricing risk affects the premiums in cross‐border mergers and acquisitions (M&A). Differences in the rigor of transfer pricing enforcement and the severity and clarity of rules across countries create differential risk of material costs for multinationals as they expand globally. We use 448 country‐level transfer pricing risk assessments by global transfer pricing partners and managers from two firms in 33 countries to develop a metric of country‐year transfer pricing risks. The resulting measure of transfer pricing risk is used to analyze the premiums of 3,103 cross‐border M&A from 2000 to 2012. We find that lower bid premiums are associated with higher transfer pricing risk in the target's country. We find the relation is stronger when expected future transfer pricing benefits are larger. Our results, consistent with the views of experts in the field, provide the first archival evidence that acquirers consider synergies created by future tax planning when estimating the value of a target.

show abstract

Section: Tests Of the Hypothesesmentioning

confidence: 99%

How Does Transfer Pricing Risk Affect Premiums in Cross‐Border Mergers and Acquisitions?

Mescall

Klassen

2018

Contemporary Accting Res

Self Cite

View full text Add to dashboard Cite

show abstract

“…(e.g. survey evidence by Klassen et al, 2017, Hoopes et al, 2015, evidence from archival data by Hopland et al, 2017, de Simone, 2016, Kim et al, 2015.…”

Section: Literature Reviewmentioning

confidence: 99%

On the Interdependency of Profit Shifting Channels and the Effectiveness of Anti-Avoidance Legislation

2017

View full text Add to dashboard Cite

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW. The issue of base erosion and profit shifting has been on the international policy agenda for several years now. The aim of this paper is to examine how firms adjust their profit shifting mechanisms in a changing institutional environment. In particular, we test whether firms substitute one profit shifting strategy for another if respective costs change. To this end, we exploit changes in the strictness of transfer pricing regulations and thin capitalization rules over time in a panel of European multinational firms and study a quasi-experimental reform setting in France. We confirm existing evidence that tightening transfer pricing regulations reduces the tax sensitivity of earnings before interest and taxes (EBIT) substantially. Our results show, however, that this reduction includes both a reduction in profit shifting activity via the transfer pricing channel and a substitution with debt shifting. Moreover, firms using debt shifting to begin with rely more heavily on tax optimization of transfer prices when thin capitalization rules are strengthened. If transfer pricing regulations are also strict, the conditional reform effects show that the substitutive response is more pronounced for a subsample of firms with a high share of intangible property (IP). The difference-in-difference approach for the French tax reform illustrates an increase in profit shifting based on transfer prices for treated firms facing new restrictions on debt shifting. Again, the effect is stronger for IP intensive firms.

show abstract

“…Market price-based transfer prices for internally traded products are often used as a value measure for the decentralised management of internal production processes (Wolff, 2007). Using a survey of tax executives from multinational corporations, Klassen et al (2017) documents that some firms set their transfer pricing strategy to minimize tax payments, but more firms focus on tax compliance.…”

Section: Literature Reviewmentioning

confidence: 99%