Taxation and the Allocation of Risk Inside the Multinational Firm

Publikation: Working paperForskning

Standard

Taxation and the Allocation of Risk Inside the Multinational Firm. / Becker, Johannes; Johannesen, Niels; Riedel, Nadine.

CESifo, 2018.

Publikation: Working paperForskning

Harvard

Becker, J, Johannesen, N & Riedel, N 2018 'Taxation and the Allocation of Risk Inside the Multinational Firm' CESifo. <https://ssrn.com/abstract=3206613>

APA

Becker, J., Johannesen, N., & Riedel, N. (2018). Taxation and the Allocation of Risk Inside the Multinational Firm. CESifo. https://ssrn.com/abstract=3206613

Vancouver

Becker J, Johannesen N, Riedel N. Taxation and the Allocation of Risk Inside the Multinational Firm. CESifo. 2018 jul. 16.

Author

Becker, Johannes ; Johannesen, Niels ; Riedel, Nadine. / Taxation and the Allocation of Risk Inside the Multinational Firm. CESifo, 2018.

Bibtex

@techreport{85e0bccf2b6443909915f49aee9a44dc,
title = "Taxation and the Allocation of Risk Inside the Multinational Firm",
abstract = "This paper provides the first theoretical and empirical analysis of how taxation shapes the joint allocation of risk and profits inside the multinational firm. Theoretically, we show that unconstrained firms optimally allocate all their risk to high-tax countries to maximize risk sharing with governments and all their profits to low-tax countries to minimize expected tax payments. However, transfer pricing rules requiring risk to be compensated with a higher expected return introduce a trade-off: the risk sharing motive to allocate risk to high-tax countries must be balanced against a pro.t shifting motive to allocate risk to low-tax countries. Empirically, we consistently find that multinational firms disproportionately allocate risk to low-tax countries. This suggests that the intra-firm allocation of risk and profits is effectively constrained by transfer pricing rules and that the profit shifting motive dominates the risk sharing motive. Finally, we show that within-firm differences in risk can account for a significant fraction of the well-established correlation between profits and tax rates suggesting that risk shifting is a quantitatively important channel for profit shifting.",
author = "Johannes Becker and Niels Johannesen and Nadine Riedel",
year = "2018",
month = jul,
day = "16",
language = "English",
volume = "CESifo Working Paper No. 7033",
publisher = "CESifo",
type = "WorkingPaper",
institution = "CESifo",

}

RIS

TY - UNPB

T1 - Taxation and the Allocation of Risk Inside the Multinational Firm

AU - Becker, Johannes

AU - Johannesen, Niels

AU - Riedel, Nadine

PY - 2018/7/16

Y1 - 2018/7/16

N2 - This paper provides the first theoretical and empirical analysis of how taxation shapes the joint allocation of risk and profits inside the multinational firm. Theoretically, we show that unconstrained firms optimally allocate all their risk to high-tax countries to maximize risk sharing with governments and all their profits to low-tax countries to minimize expected tax payments. However, transfer pricing rules requiring risk to be compensated with a higher expected return introduce a trade-off: the risk sharing motive to allocate risk to high-tax countries must be balanced against a pro.t shifting motive to allocate risk to low-tax countries. Empirically, we consistently find that multinational firms disproportionately allocate risk to low-tax countries. This suggests that the intra-firm allocation of risk and profits is effectively constrained by transfer pricing rules and that the profit shifting motive dominates the risk sharing motive. Finally, we show that within-firm differences in risk can account for a significant fraction of the well-established correlation between profits and tax rates suggesting that risk shifting is a quantitatively important channel for profit shifting.

AB - This paper provides the first theoretical and empirical analysis of how taxation shapes the joint allocation of risk and profits inside the multinational firm. Theoretically, we show that unconstrained firms optimally allocate all their risk to high-tax countries to maximize risk sharing with governments and all their profits to low-tax countries to minimize expected tax payments. However, transfer pricing rules requiring risk to be compensated with a higher expected return introduce a trade-off: the risk sharing motive to allocate risk to high-tax countries must be balanced against a pro.t shifting motive to allocate risk to low-tax countries. Empirically, we consistently find that multinational firms disproportionately allocate risk to low-tax countries. This suggests that the intra-firm allocation of risk and profits is effectively constrained by transfer pricing rules and that the profit shifting motive dominates the risk sharing motive. Finally, we show that within-firm differences in risk can account for a significant fraction of the well-established correlation between profits and tax rates suggesting that risk shifting is a quantitatively important channel for profit shifting.

M3 - Working paper

VL - CESifo Working Paper No. 7033

BT - Taxation and the Allocation of Risk Inside the Multinational Firm

PB - CESifo

ER -

ID: 231707756