Multinationals have the opportunity to shift taxable profits to low tax countries by means of intragroup transactions. Although transfer prices must conform to the arm’s length standard, market prices are not available if transferred assets or performed services are firm-specific. In these cases, companies have considerable leeway in assessing transfer prices. We use the research and development (R&D) intensity as a proxy for firmspecific assets and services that are associated with enhanced opportunities to shift profits. This paper investigates (i) whether R&D-intensive multinational companies have enhanced opportunities to shift profits and (ii) whether these companies are less responsive to local taxes when they make decisions about real investments. An empirical analysis based on firm-level data on German outbound FDI during the period 1996 until 2005 reveals that the tax response of intragroup transactions depends on the R&D intensity of multinational companies. Furthermore, the impact of taxes on investments decreases with an increasing R&D intensity, leading to the result that the local tax rate becomes less important for investment decisions of R&D intensive multinational companies.
Overesch, Michael and Ulrich Schreiber (2008), R&D Intensities, International Profit Shifting, and Investment Decisions, Discussion Papers, University of Mannheim, Mannheim