Tax Avoidance by Multinational Corporations and Regulations

• In Event: Mobile Firms and the Political Economy of Taxation

Abstract

Despite the fact that many developing countries rely heavily on tax revenues from multinational corporations (MNCs) as a main government revenue source, it is reported that many MNCs pay less in taxes by shifting their income generated in host countries to low (or zero) tax rate countries through transfer pricing, a typical tax avoidance strategy MNCs commonly use. Although many developing countries regulate these tax planning practices– transfer pricing by MNCs-, the degree of transfer pricing regulations varies across countries. I explain that countries with strong rule of law are less likely to tighten transfer-pricing regulations. The reason is that MNCs are more likely to enter into countries with the strong rule of law and thereby give more voices over the policymaking process in their favorable direction compared to domestic firms. I test this argument using a dataset on transfer pricing regulations in developing countries between 2001 and 2011.

Author

• Mi Jeong Shin, Shanghai University of Finance and Economics