Can Transfer Pricing Documentation Curb Profit Shifting?
Are Documentation Rules the Answer?
In this Research in a Minute video, doctoral student Katharina Schmidt discusses her research on a widely used policy tool to control transfer pricing: special documentation requirements. These rules mandate that companies record how they set internal prices and to justify that these prices are “at arm's length”, indicating that independent parties would select a similar price.
Evidence from a Reform in France
The study exploits a change in documentation requirements in France. At first glance, the measure appears to be working: companies subject to the documentation requirement report surprisingly low profits in France less often. This suggests that profit shifting via transfer pricing is indeed being curbed.
A Less Visible Trade-Off
However, the reform also leads to unintended effects. As documentation increases compliance costs, affected companies reduce investment. This decrease is evident not only in France but also at foreign firms' locations, particularly in low-tax countries.
Implications for International Tax Policy
The message for policymakers is nuanced: while transfer pricing documentation can reduce profit shifting, it may also have negative effects on investment. Overall, this research offers important insights into the broader discussion on how to design an international tax system that balances fairness with economic efficiency.
👉 Watch the Research in a Minute video to hear the key insights from the study in one minute.
Further Readings:
- The full research paper can be read here.
- Watch this one-minute insight here:
