Feb 1, 2018

Economic integration and agglomeration of multinational production with transfer pricing

CES ifo Public Economic Seminar
  • Hirofumi Okoshi

Presentation type
Oral presentation (general)
University of Munich
University of Munich

Do low corporate taxes always favor multinational production in the course of economic integration? We build a two-country spatial model with different corporate tax rates in which multinational enterprises (MNEs) can manipulate transfer prices in intra-firm trade. Using transfer pricing, MNEs can shift profits between domestic production plants and foreign distribution affliates. In the beginning of integration, MNEs' plants are concentrated in the low-tax country, and in the later stage, this location pattern reverses. High taxes may favor multinational production; but it does not guarantee greater tax revenues. We also analyze tax competition between two unequal-sized countries and show that profit shifting leads to tougher competition.