Transparency and Transfer Prices
Ortmann and Simons investigate how increased transparency in transfer pricing influences (i) corporate reporting decisions, (ii) tax authority incentives, and (iii) economic outcomes such as tax revenue and the allocation of investments among countries. Using a theoretical approach, they contrast two competing transparency regimes. They study a regime mandating a high level of transparency (country-by-country reporting) under which tax authorities are able to monitor transfer prices. Furthermore, they analyze allocations of taxable income relying on a formula-based distribution procedure. While such procedure prohibits conventional accounting-based profit shifting through transfer pricing, it might cause real effects.