Transfer Pricing of Intrafirm Sales as a Profit Shifting Channel - Evidence from German Firm Data

This paper investigates whether transfer pricing of intrafirm sales within multinationals represents an important channel of company tax planning. A simple theoretical model, considering profit shifting activities of a multinational company, is used to obtain empirical implications. The empirical analysis, based on a panel of German multinationals, considers directly the supposed tax response of intrafirm sales. The analysis shows a significantly negative impact of the local tax rate on the size of balance sheet items, which reflect intrafirm sales. Thus, the results suggest that transfer pricing of intrafirm sales constitutes an important channel of companies’ profit shifting activities.

Overesch, Michael (2006), Transfer Pricing of Intrafirm Sales as a Profit Shifting Channel - Evidence from German Firm Data, ZEW Discussion Paper Nr. 06-084, Mannheim.