Multinational corporation

Microeconomics

Economics

Archaeology

International economics

Tariff

Finance

Business

International trade

Mathematics

Unit (ring theory)

Transfer pricing

Monetary economics

Mathematics education

Charter

Industrial organization

History

Journal of Accounting and Economics

We study the roles of the head office (HO) and the business units (BUs) of a multinational corporation (MNC) in reducing income tax and tariff payments through internal transfer prices in international trades. Using confidential transfer price data of a large MNC, we analyze how the different elements of internal transfer prices set by the HO and BUs vary differently from external prices with income tax rates, tariff rates, and the tradeoff between the two. Absent severe agency conflicts, we find that the BUs contribute more to tax planning than the HO, despite that explicit incentives to do so are not included in the compensation schemes. The roles of the HO and BUs vary with product market competition, the risk of conflicts with tax and customs authorities, and agency problems within the firm. Moreover, we provide evidence of strategic trade cost allocations among BUs to reduce income taxes.

Tax and tariff planning through transfer prices: The role of the head office and business unit