Multinational enterprises (MNEs) have incentive to reduce tax payment through transfer pricing. The incentive is stronger when MNEs own intangibles, because it is easy to transfer them across countries. To mitigate such strategic tax planning, the OECD proposes the arm’s length principle (ALP). This paper deals with technology patents as an example of intangibles and investigates how the ALP affects MNEs’ licensing strategies and welfare in a model with a tax haven. The ALP may distort MNEs’ licensing decisions, because providing a license to unrelated firms restricts MNEs’ profit-shifting opportunities due to the emergence of comparable transaction. Interestingly, the termination of licensing in the presence of the ALP may worsen domestic welfare if the (potential) licensee and the MNE’s subsidiary do not compete in the domestic market but may improve welfare if they compete. The results under ad valorem royalty are in distinct contrast with those under per-unit royalty.
|Journal||International Tax and Public Finance|
|Publication status||Accepted/In press - 2022|
Bibliographical noteFunding Information:
The authors wish to thank Nadine Riedel (editor) and two anonymous referees for helpful comments and suggestions. We also thank Andreas Haufler, Hiro Kasahara, Hiroaki Kobayashi, and the participants of the conferences and workshops at Hitotsubashi University, Kobe University, RIETI, Ryukoku University, University of Glasgow, University of Hawaii, University of Munich, and University of Tokyo for helpful comments. Choi acknowledges financial support from the Ministry of Education of the Republic of Korea and the National Research Foundation of Korea (NRF-2020S1A5A2A01040865). Ishikawa acknowledges financial support from the Japan Society of the Promotion of Science through the Grant-in-Aid for Scientific Research (A): Grant Number 17H00986 and 19H00594. Okoshi acknowledges financial support from Deutsche Forschungsgemeinschaft (German Science Foundation, GRK1928). The usual disclaimer applies. The authors declare no conflict of interest. No data was generated or analyzed in this study
© 2022, The Author(s), under exclusive licence to Springer Science+Business Media, LLC, part of Springer Nature.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics