Regina Ortmann, Assistant Professor for International Business Taxation at Paderborn University, is Principle Investigator of the project B06 “Transparency and Transfer Prices”. Together with Dirk Simons, she investigates how increased transparency in transfer pricing influences corporate decisions on investments, production, reporting and audit strategies of tax authorities.
Analytical tax research: a glimpse into the future
While the majority of tax researchers work empirically, I deliberately chose an academic career in analytical tax research. The initial spark for my decision was a tax model I learned about in a lecture. I was deeply fascinated – and it still thrills me how reliably a cleverly set up model allows predictions to be made. About how, for example, companies will react to a new tax reform – or at least how they should react. After all, in our models we usually assume homo oeconomicus, someone who thinks exclusively rationally. Indeed, this is rarely the case. Actions are always influenced by feelings, emotions and external factors. Nevertheless, models allow us to anticipate effects and actions and to make predictions. In a way, analytical tax research gives us a glimpse into the future. And in doing so, it can provide important insights for regulators and policymakers – for example, when it comes to deciding on tax reforms.
With our research within the TRR 266 we can contribute to a fairer distribution of taxes.
More Transparency, fairer taxation?
And that is what I consider to be a very important aspect. I don’t want to do research just for the sake of it, I want to make a difference. And I am convinced that with our research within the TRR 266 we can contribute to a fairer distribution of taxes. Especially in recent years, it has become obvious that many multinational enterprises (MNEs) such as Google or Apple transfer their profits to low-tax countries to avoid taxes. This leads to societal discord and disparities – with direct effects on economy and society. Various OECD and EU initiatives address this problem by focusing on greater transparency. The consequence of these initiatives are regulations that oblige companies to disclose certain information. We examine the impact of this greater transparency – and whether it leads to desired or to unintended effects – in a transfer pricing context.
In order to be able to assess the effectiveness of a reform, we have to anticipate MNEs’ reactions to changes in the taxation regime.
Focusing on transfer prices
A popular vehicle for companies to transfer profits from high-tax to low-tax countries are the so-called transfer prices. Transfer prices are paid for the trade of goods, services and for the use of intellectual property within a corporation. These internal transactions account for around 70-80 percent of the global trading volume. Although certain laws and regulations specify how these prices are to be set, transfer prices are still very susceptible to tax planning. In project B06 we therefore investigate how the handling of transfer prices changes when the company has to disclose certain information. For example, information that helps to assess how much economic substance a group company really has and what share of the taxable group profit should therefore be allocated to each group company. Against this background, we examine how this increased transparency affects general business decisions, such as sales and location decisions. In order to be able to assess the effectiveness of a reform, we have to anticipate MNEs’ reactions to changes in the taxation regime.
Tax policymakers should consider these findings when developing Pillar One of the global tax reform.
Effects of the OECD’s global tax reform
In our new working paper, we examined these questions in light of the OECD’s global tax reform, which has been agreed upon by more than 130 countries in July 2021. The reform aims to ensure that multinationals contribute their fair share of tax revenues to the domicile states. For this purpose, a certain share of the multinationals’ taxable income will be allocated to the countries according to how much sales were generated there. Our model shows that the effects of this international tax reform depend on the properties of the underlying product markets. For traditional industries, the reform increases tax revenues in high-tax market countries – and, remarkably, even attracts production. For modern digital product markets, tax revenues of low-tax countries can increase as well. Tax policymakers should consider these findings when developing Pillar One of the global tax reform.
We investigate the impact of country-by-country reporting (CbCR) on the handling of transfer prices, on business decisions and on the behavior of tax authorities.
Effects of Country-by-Country Reporting
In another project, we investigate the impact of country-by-country reporting (CbCR) on the handling of transfer prices, on business decisions and on the behavior of tax authorities. CbCR was introduced in Germany and many other OECD countries in 2016 Since then, companies had to disclose significantly more information to tax authorities. Information that is relevant to assess whether transfer prices are set appropriately or whether they are manipulated in order to shift profits to low-tax countries. With regard to a public country-by-country reporting, which is soon to be introduced in the EU, we are planning a follow-up project. The public CbCR will make information public that is currently only accessible to tax authorities. This is a huge step! The reputational and competitive effects this reform may have on companies are currently widely discussed – many things are conceivable. This is a very exciting topic that we would like to examine in more detail on the basis of disclosure theory.
The TRR 266 opens up many new opportunities – for research and personal development.
TRR 266: broad networking and new opportunities
Without the TRR 266, this research project might not exist in this form. At least the project team would probably have been different. This is one of the great strengths of the TRR 266: it brings researchers from different locations and with different research focuses together. As a consequence, it opens up many new opportunities – for research and personal development. I myself benefit a lot from this broad networking and – metaphorically speaking – from the “short distances”: There are many established experts at the TRR 266 – and I can reach out to them whenever I need input or feedback. Internal events are also held on a regular basis so that we can discuss our current research. For me, this is a great opportunity to get new impulses. I also find it particularly valuable that I meet young researchers at the TRR 266 who are doing analytical research just like me. Because there are relatively few of us across Germany. So, we seized this opportunity and started an Analytical Reading Group. We now meet once a month and read and discuss analytical papers together.
I can only recommend research stays at other universities or in other countries. You and your research can benefit a lot.
Research stays: growing as a researcher
Our Collaborative Research Center was also crucial for another important stage in my life: the TRR 266 granted me a research stay at Stanford. An absolutely exceptional university and a great opportunity to grow as a researcher. I still remember how I presented my research in a seminar. There were so many top-class researchers in the auditorium – with their feedback they helped me right away to significantly improve my research. Even at an international conference you don’t usually present your research in front of such an audience. At least not as a young researcher. I can only recommend research stays at other universities or in other countries. You and your research can benefit a lot. My stay at NHH Bergen had also a huge effect on my research, since a lot of analytical tax research is done there. During that time at the NHH, I also started a joint project with Dirk Schindler on transfer pricing. In a way, this was the starting point for the research I am doing within the TRR 266 right now.
*The article reflects the opinion of the researcher and not necessarily the views of the TRR 266. As a scientific association, the TRR 266 is committed to both freedom of speech and political neutrality.