DP5952 Taxes and Decision Rights in Multinationals

Author(s): Soren Bo Nielsen, Pascalis Raimondos, Guttorm Schjelderup
Publication Date: November 2006
Keyword(s): centralized vs. de-centralized decisions, MNEs, taxes, transfer prices
JEL(s): F23, H25, L23
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5952

We examine how a multinational's choice to centralize or de-centralize its decision structure is affected by country tax differentials. Within a simple model that emphasizes the multiple conflicting roles of transfer prices in MNEs - here, as a strategic pre-commitment device and a tax manipulation instrument - we show that decentralization is preferred in case of small tax differentials, whereas centralization can be more profitable, when tax differentials are large. In essence, the organizational flexibility of MNEs is triggered by the scope for tax minimization. Our analysis allows for both commitment and non-commitment to transfer prices, and for alternative modes of competition.