Transfer Pricing: Strategies, Practices, and Tax Minimization

61 Pages Posted: 13 Feb 2013 Last revised: 22 Jul 2018

See all articles by Kenneth J. Klassen

Kenneth J. Klassen

University of Waterloo - School of Accounting and Finance

Petro Lisowsky

Boston University Questrom School of Business; Norwegian Center for Taxation

Devan Mescall

University of Saskatchewan

Date Written: August 17, 2015

Abstract

Using a survey of tax executives from multinational corporations, we document that some firms set their transfer pricing strategy to minimize tax payments, but more firms focus on tax compliance. We estimate that a firm focusing on minimizing taxes has a GAAP effective tax rate that is 6.6 percentage points lower and generates about $43 million more in tax savings, on average, than a firm focusing on tax compliance. Available Compustat data on sample firms confirm our survey-based inferences. We also find that transfer pricing-related tax savings are greater when higher foreign income, tax haven use, and R&D activities are combined with a tax minimization strategy. Finally, compliance-focused firms report lower FIN 48 tax reserves than tax-minimizing firms, consistent with the former group using less uncertain transfer pricing arrangements. Collectively, our study provides direct evidence that multinational firms have differing internal priorities for transfer pricing, and that these differences are strongly related to the taxes reported by these firms.

Keywords: transfer pricing, multinational tax planning, tax minimization, tax compliance

JEL Classification: H25, H26, H32, K34, M41

Suggested Citation

Klassen, Kenneth and Lisowsky, Petro and Mescall, Devan, Transfer Pricing: Strategies, Practices, and Tax Minimization (August 17, 2015). Contemporary Accounting Research, Vol. 34, No. 1, 2017, Available at SSRN: https://ssrn.com/abstract=2216870 or http://dx.doi.org/10.2139/ssrn.2216870

Kenneth Klassen

University of Waterloo - School of Accounting and Finance ( email )

Waterloo, Ontario N2L 3G1
Canada
519-888-4567 x38550 (Phone)
519-888-7562 (Fax)

Petro Lisowsky

Boston University Questrom School of Business ( email )

595 Commonwealth Avenue
Ste. 518H
Boston, MA 02215
United States
6173532661 (Phone)

Norwegian Center for Taxation ( email )

Helleveien 30
Bergen, Bergen 5045
Norway

Devan Mescall (Contact Author)

University of Saskatchewan ( email )

Edwards School of Business
Saskatoon, Saskatchewan S7N 5A7
Canada

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