Taxing Multinationals

Taxing Multinationals: Transfer Pricing and Corporate Income Taxation in North America

LORRAINE EDEN
Copyright Date: 1998
Pages: 856
https://www.jstor.org/stable/10.3138/9781442680371
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  • Book Info
    Taxing Multinationals
    Book Description:

    Eden examines how transfer pricing has been handled in different disciplines, including international business, economics, accounting, law and public policy.

    eISBN: 978-1-4426-8037-1
    Subjects: Business

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-x)
  3. Preface
    (pp. xi-xvi)
    LORRAINE EDEN
  4. PART I: THE RULES OF THE GAME
    • 1 Taxing Multinationals: An Introduction to the Issues
      (pp. 3-62)

      Governments use taxes to finance public spending. Given that the ultimate purpose of taxes is to raise sufficient revenues to finance expenditures, how should these revenues be raised?

      Most economists would answer this question by arguing that governments should set up their domestic tax systems with two underlying principles of public finance in mind: equity and neutrality. A good tax system should beequitable– that is, two taxpayers in similar economic circumstances should pay the same tax (horizontal equity) and taxpayers in different circumstances should pay appropriately different taxes (vertical equity). The system should also beneutral– that...

    • 2 The International Tax Transfer Pricing Regime
      (pp. 63-122)

      The purpose of this chapter is to explain how and why tax authorities regulate the transfer pricing policies of multinational enterprises. We see these regulations as having a coherent structure and focus, such that they may be characterized as part of aninternational tax transfer pricing regime(theTTP regime). International regimes are sets of functional and behavioural relationships among national governments in particular issue areas of the international political economy. We argue that there exists an international TTP regime in which national tax authorities have cooperated to develop certain principles, norms, rules, and procedures designed to facilitate state regulation...

  5. PART II: MULTINATIONALS AND INTRAFIRM TRADE
    • 3 The Multinational Enterprise as an Integrated Business
      (pp. 125-173)

      In this chapter we briefly explain what multinational enterprises are, why they exist, and how they organize their activities. The chapter is divided as follows. We first outline the basic explanation for why MNEs exist and why they are successful – that is, the OLI or eclectic paradigm. We then outline the theory of global strategic management of MNEs, and the coordination and configuration decisions that such firms face. We discuss the types of activities in which integrated businesses are engaged, and the factors that influence MNE intrafirm trade patterns. Lastly, we focus on one locational factor, regional integration, and...

    • 4 Multinationals and Intrafirm Trade in North America
      (pp. 174-208)

      In this chapter we examine the roles played by multinationals, in particular by U.S. MNEs, in the North American economy. We first examine U.S. and Canadian trade and investment patterns, focusing on their linkages with each other, and with Mexico, Japan, and the European Community. Next we look at the top 20 multinationals in Canada and the United States. Our focus then shifts to estimates of the size and pattern of Canadian and U.S. intrafirm trade in goods and services, using estimates from the U.S. Department of Commerce and Statistics Canada.

      We find that about two-thirds of Canada’s trade and...

  6. PART III: TRANSFER PRICING AND TAXATION
    • 5 The Simple Analytics of Transfer Pricing
      (pp. 211-278)

      In order to explain the theory behind transfer pricing regulation and to use the theory to critique existing legislation, it is important to understand how economists believe MNEs behave, and in what ways their behaviour differs from that of purely domestic firms. There is a well-developed economics literature on transfer pricing which explains why multinationals choose certain transfer prices, how these prices are affected by government regulatory barriers such as tariffs and income taxes, and the impacts of these regulations on MNE output, sales, and intrafirm trade levels.

      The microeconomic literature on transfer pricing is reasonably small, technical, and primarily...

    • 6 Taxing Multinationals in Theory
      (pp. 279-319)

      The topic ‘taxing multinationals’ must be covered from both the theoretical and empirical perspectives. We do this in two chapters: this one (Chapter 6: Theory) and the next (Chapter 7: Practice).

      In this chapter, we extend the microeconomic models developed in Chapter 5 to encompass government regulation of the multinational enterprise. This provides us with a theory of the effects of taxation on transfer pricing. First, we develop a variety of models that show how various types of taxes affect MNE behaviour. We examine the impact of trade taxes on the MNE, looking at tariffs as an example. We then...

    • 7 Taxing Multinationals in Practice
      (pp. 320-380)

      How much taxes do multinationals pay? How often do they engage in transfer price manipulations designed to reduce their tax bills? How much tax revenues are lost due to transfer price manipulation?

      In this chapter, we address these issues in four parts. First we review the relevant literature on transfer price manipulation (TPM) in response to tax differentials. Second, we examine the recent (and ongoing) U.S. debate over the alleged tax abuse by foreign multinationals in the United States. Third, we provide additional light on the U.S. tax debate, using our own estimates of U.S. and foreign taxes paid by...

  7. PART IV: THE RULES OF THE GAME IN NORTH AMERICA
    • 8 The U.S. Tax Transfer Pricing Regulations Part I: Rules
      (pp. 383-453)

      U.S. law with respect to the pricing of intercompany transactions comes from four sources:

      1.Legislation: The key piece of legislation is Internal Revenue Code (IRC) section 482 dealing with the allocation of income and deductions under the corporate income tax, but there are other IRC sections dealing with issues such as intrafirm transfers to Puerto Rico, valuing royalty payments, reporting requirements and penalties.

      2.Regulations: The key ones are the U.S. Treasury 1968 regulations interpreting section 482 and the 1994 regulations (which went through three versions: 1992, 1993, and 1994), but other Treasury regulations dealing with intrafirm aspects of the Revenue...

    • 9 The U.S. Tax Transfer Pricing Regulations Part II: Procedures
      (pp. 454-482)

      The previous chapter dealt with the U.S. rules or methods for pricing intrafirm transactions. We turn now to the U.S. administrative procedures which supplement the rules.

      In the first part of the chapter, we outline the general procedures used by the Internal Revenue Service in auditing taxpayers under the corporate income tax at the examination, appeals, litigation, and competent authority stages, and discuss some problems with the general process. We then turn to recent solutions.

      Since the early 1980s, the Internal Revenue Service has introduced two types of procedural changes designed to improve taxpayer compliance in the transfer pricing area....

    • 10 The Canadian Tax Transfer Pricing Regulations
      (pp. 483-524)

      Canadian law, like that of the United States, with respect to the pricing of intercompany transactions, comes from four sources:

      Legislation: The key piece of legislation is Income Tax Code section 69 dealing with intercompany pricing.

      Regulations: Revenue Canada’s 1987 Information Circular interpreting section 69 is the most important regulation in this area. Other circulars – for example, that proposing an advance pricing agreement (APA) for Canada and the January 1994 News Release – are also part of the Canadian regulatory framework.

      Court rulings: There have been very few court cases on transfer pricing, and most of these have dealt...

    • 11 Transfer Pricing and the Tax Courts
      (pp. 525-546)

      In this chapter, we examine in detail one transfer pricing case that has gone to tax court in Canada:Indalex versus the Queen(DTC 1984, 1986, 1988). This is perhaps the best known of the Canadian court cases. Our purpose in going through this case in detail is to show how economics, accounting, business, and tax law are all involved in applying the arm’s length standard to a real situation. Indalex is a good example of the complexities of transfer pricing regulation in practice.

      In chapters 5 and 6, we developed theoretical models of transfer pricing and of the impacts...

  8. PART V: REFORMING THE RULES OF THE GAME
    • 12 Reforming the International Tax Transfer Pricing Regime Part I: Principles and Norms
      (pp. 549-583)

      We have argued in this book that there is an international tax regime in the transfer pricing area –the international tax transfer pricing (TTP) regime– centred on the principle of the arm’s length, transactions-based standard. The basic purpose behind the regime is to help governments deal with the problems multinational enterprises generate for national taxation.

      The TTP regime, however, is not without its problems in practice. First, both MNEs and nation-states can subvert the ‘rules of the game.’ That is, the two key actors involved in the TTP regime can – and often do – either ignore or...

    • 13 Reforming the Tax Transfer Pricing Regime Part II: Rules and Procedures
      (pp. 584-633)

      Chapter 12 outlined the practical difficulties associated with the principles and norms of the international tax transfer pricing regime. The chapter concluded that existing tax transfer pricing practices deviate in significant ways from the behaviours one would like to find in a well-designed international regime, and proposed various alternatives to reform the principles (international equity and neutrality) and the norm (the arm’s length standard).

      In this chapter, we examine the practical difficulties associated with the rules and procedures of the tax transfer pricing regime. We assess the pluses and minuses of the existing rules and procedures, and offer suggestions for...

    • 14 Conclusions and Policy Recommendations
      (pp. 634-652)

      This chapter concludesTaxing Multinationals. We have argued in this book that multinational enterprises are integrated businesses. This integration is occurring in both a geographic dimension as MNEs spread their activities around the globe, and an organizational dimension as MNEs engage in networks, strategic alliances, keiretsu structures, and other forms of equity- and nonequity-based relationships.

      Integrated enterprises are difficult to tax. National tax authorities assume that multinationals can be decomposed into individual firms, each with income, expenditures, and assets that can be measured on a consistent basis within a tax jurisdiction. Transactions between these firms, for tax purposes, are valued...

  9. Notes
    (pp. 653-696)
  10. Glossary of Economic and Accounting Terms
    (pp. 697-704)
  11. Bibliography
    (pp. 705-736)
  12. Author Index
    (pp. 737-742)
  13. Subject Index
    (pp. 743-757)