DP5952 Taxes and Decision Rights in Multinationals

Author(s): Soren Bo Nielsen , Pascalis Raimondos-Møller , Guttorm Schjelderup

Publication Date: November 2006

Keyword(s): centralized vs. de-centralized decisions , taxes , transfer prices , MNEs

JEL(s): F23 , H25 , L23

Programme Areas: International Trade and Regional Economics

Link to this Page: www.cepr.org/pubs/dps/DP5952.asp.asp

We examine how a multinational's choice to centralize or de-centralize its decision structure is affected by country tax differentials. Within a simple model that emphasizes the multiple conflicting roles of transfer prices in MNEs - here, as a strategic pre-commitment device and a tax manipulation instrument - we show that decentralization is preferred in case of small tax differentials, whereas centralization can be more profitable, when tax differentials are large. In essence, the organizational flexibility of MNEs is triggered by the scope for tax minimization. Our analysis allows for both commitment and non-commitment to transfer prices, and for alternative modes of competition.