Dec 21, 2019
Innovation for tax avoidance: Product differentiation and the arm's length principle
Japanese Society of International Economics Kanto
- Presentation type
- Oral presentation (general)
- Japan Society of International Economics Kanto
- Nihon University
High product differentiation enhances consumers’ utility and firms’ profits but at the same time makes it difficult for tax authorities to audit MNEs’ tax avoidance strategies, as the arm’s length principle is difficult to apply. This paper combines these two aspects of product differentiation and studies the interrelation between profit shifting and product differentiation. The model shows that MNEs engage in more investment in product differentiation in the presence of profit shifting opportunities and globalization accelerates the investment. the model also show that globalization can improve welfare in a non-tax haven.