Inefficiencies of Bilateral Advanced Pricing Agreements (BAPA) in Taxing Multinational Companies

Abstract

While regulations on tax evasion via transfer pricing have been thoroughly explored in the literature, little is known about the effects of domestic tax policies under a Bilateral Advanced Price Agreement (hereafter BAPA) on production decisions of multinational companies. I show that, even if BAPAs prohibit income shifting through transfer pricing, inefficiencies arise via distorted production when markets across countries are interrelated through intra-firm trade of multinational companies. The analysis provides governments with useful guidance for how to coordinate tax agreements.

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