Tax Reforms and Evidence of Transfer Pricing

Abstract

The manipulation of transfer prices changes the relative tax burdens multinational firms face in their different countries of operation. Transfer price manipulation also triggers changes in the tariffs that are levied on intra-company imports. For this reason, when tax rates change, as they did for many countries during the 1980s, the incentive to manipulate transfer prices varies substantially across products. I use product-level variation in tariff duties to identify transfer pricing changes in products imported to the U.S. The empirical results indicate that variations in the reported customs values of U.S. imports from Canada, France, Germany, Japan, and the U.K. were consistent with the transfer pricing incentives created by taxes and tariffs.

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