Tax Reforms and Evidence of Transfer Pricing

The manipulation of transfer prices changes the relative tax burdens multinational firms face in their different countries of operation and may even reduce a firm’s worldwide tax payments. At the same time, transfer price manipulation will often trigger changes in the tariffs that are levied on intra-company imports. For this reason, when tax rates change, as they did for many countries during the 1980’s, the incentive to manipulate transfer prices varies substantially across products. I use product-level variation in tariff duties to help me identify transfer pricing in products imported to the U.S. My empirical results indicate that reported customs values of U.S. imports from Canada, France, Germany, Japan and the U.K. were consistent with the transfer pricing incentives created by taxes and tariffs. While the results are statistically significant, they are economically small, implying that a 5 percent reduction in foreign corporate tax rates will cause the reported price of affiliated firm imports to rise by a mere 0.024%. The meaning of these results and the implied value of transfer pricing penalties are explored. Acknowledgements: I thank Robert Feenstra and Harry Grubert, Andrew Lee and Bob Lipsey for helpful discussions. Financial support from the IGCC of the Institute for Governmental Affairs is gratefully acknowledged. Contact Information: Department of Economics, University of California, Davis, CA 95616. Phone (530) 752-1569, Fax (530) 752-9382. Email: [email protected]. 2