Alex A.T. Rathke, Amaury José Rezende and Christoph Watrin
This study investigates the impact of different transfer pricing rules on tax-induced profit shifting. Existing studies create different enforcement rankings of countries based on…
Abstract
Purpose
This study investigates the impact of different transfer pricing rules on tax-induced profit shifting. Existing studies create different enforcement rankings of countries based on specific transfer pricing provisions on the assumption that larger penalties and more extensive information requirements imply higher tax enforcement. This assumption carries limitations related to the impact of transfer pricing rules in different countries and to the interaction of different tax rules. Instead, the authors propose a nonordered segregation of groups of countries with different transfer pricing rules, and they empirically investigate the impact of these transfer pricing rules on the profit-shifting behavior of firms.
Design/methodology/approach
The authors apply the hierarchical clustering method to analyze 57 observable quantitative and qualitative characteristics of transfer pricing rules of each country. This approach allows the creation of groups of countries based on a comprehensive set of regulatory characteristics, to investigate evidence of profit shifting for each of these separate groups. Profit-shifting behavior is measured by the variation in the volume of import and export transactions between local firms and related parties located in other countries.
Findings
The results indicate that firms have a higher volume of intrafirm transactions with related parties located in countries with a lower tax rate. This result is consistent with the profit-shifting hypothesis. Moreover, the results show that relevant differences in transfer pricing rules across countries produce different effects on the volume of intrafirm transactions. The authors observe that the existence of domestic transfer pricing rules that override the OECD Transfer Pricing Guidelines may inhibit profit shifting. In addition, the results suggest that the OECD guidelines may facilitate profit shifting. Overall, it is observed that some transfer pricing rules may be more effective than others in curbing profit shifting and that firms are still able to manipulate transfer prices under some tax rules.
Research limitations/implications
(1) The authors focus on the Brazilian context, which provides a suitable set of profit-shifting incentives for the analysis, since it combines an extreme corporate tax rate, a highly complex tax system, and a unique set of transfer pricing rules. (2) Profit-shifting behavior is captured by the volume of intrafirm transactions. The authors would prefer to observe the transfer price directly; however, this information is not disclosed by firms, for it may represent a limitation to the investigation. Nonetheless, theory shows that the profit-shifting behavior is reflected by the manipulation of both transfer prices and intra-firm outputs.
Practical implications
The authors find that the volume of intrafirm transactions may decrease or increase, depending on the transfer pricing system of the foreign country (including the tax-differential effect). It suggests that some transfer pricing rules are more effective than others in curtailing the profit-shifting behavior and that firms are still able to find vulnerabilities in current rules and take advantage of them in deploying a profit-shifting strategy.
Social implications
Results provide knowledge about how key differences on transfer pricing rules across countries influence the profit-shifting behavior. The results of the study may have valuable application in solving regulatory mismatches, to eliminate blind spots in transfer pricing rules and thus to contribute to the current review of OECD guidelines and to the global tax reset movement.
Originality/value
Recent studies suggest that if tax-avoidance incentives are somewhat weak, it becomes difficult to observe the shifting behavior of firms. The puzzle is to check whether profit shifting is nonexistent under weak incentives or whether this is a matter of methodological limitations. The authors’ analysis is applied to a complex tax background with strong profit-shifting incentives; thus, it allows the authors to obtain robust evidences of the shifting behavior and the effect of different transfer pricing rules.
Details
Keywords
Isabel Costa Lourenço, Alex Rathke, Verônica Santana and Manuel Castelo Branco
The purpose of this study is to examine whether firms from countries presenting higher levels of corruption are more likely to have higher levels of earnings management than their…
Abstract
Purpose
The purpose of this study is to examine whether firms from countries presenting higher levels of corruption are more likely to have higher levels of earnings management than their counterparts from countries with lower levels of corruption. It also explicitly examines how this relationship compares between emerging and developed economies.
Design/methodology/approach
Using multiple regression analysis, this study tests the hypothesis of positive association between the countries’ level of corruption and the level of earnings management using a sample of foreign firms with American Depositary Receipts in the US market.
Findings
Findings indicate that higher corruption perception is related to higher incentives for firms to manipulate earnings in the case of emerging countries. Such results are not identified in developed countries where the level of minority investors’ protection is higher. Findings also indicate that in developed countries earnings management is negatively related to investor protection, which is not the case for emerging countries.
Originality value
As far as the authors are aware, this study is the first to examine the effects of corruption on earnings management on the basis of accounting firm-level data.
Details
Keywords
The purpose of this paper is to shed critical light on micro‐finance.
Abstract
Purpose
The purpose of this paper is to shed critical light on micro‐finance.
Design/methodology/approach
This scheme is managed from an economic perspective.
Findings
Micro‐finance comes to us as a left wing attack on the free enterprise system; as such, it ought to be opposed by all freedom lovers, at least in its present format. Other baggage weighing it down is, if not absolute fraud, then, what might well be considered at least serious chicanery. A further criticism is the cult‐like behavior now surrounding it. However, is micro‐finance per se necessarily fraudulent? Can it only be favored by critics of laissez faire capitalism? What of micro‐finance shorn of all such encumbrances? Should it then be supported? No. Even the Platonic Ideal of micro‐finance has serious difficulties. This claim is a matter of prudential judgment, not praxeology. But, even a pure‐as‐the‐driven‐snow variety of this scheme still violates the economic concepts of specialization and division of labor, an appreciation of the infant industry fallacy, and several other basic building blocks of the dismal science. There are other better ways to “cure poverty” than this misbegotten scheme. This one, paradoxically, exacerbates impoverishment by placing investment resources in hands less capable of making it grow than would otherwise be the case.
Practical implications
It would be unwise to invest in or support this scheme.
Social implications
Society should instead rely upon free enterprise banking, the occupy movement to the contrary notwithstanding.
Originality/value
It takes a minority position on this very popular institution.