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  Strategic Trade Policy through the Tax System

Becker, J. (2010). Strategic Trade Policy through the Tax System. CESifo Working Paper, Nr. 3066.

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 Creators:
Becker, Johannes1, Author              
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1Public Economics, MPI for Intellectual Property, Competition and Tax Law, Max Planck Society, ou_830548              

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Free keywords: corporate taxation, repatriation tax, transfer pricing
 Abstract: If conventional instruments of strategic trade policy are unavailable, the system of foreign profit taxation and transfer price guidelines may serve as surrogate policy instruments. In this paper, I consider a model where firms from two countries compete with each other on a third market. I analyze optimal policy choices of the firms’ residence countries aiming at strategically manipulating the competitivity of their firms on the third market. I show that, as has recently been claimed, countries prefer the tax exemption system over the tax credit system if transfer prices for headquarter services to the affiliate are close to the headquarter’s variable cost and if the third country’s tax rate is low (i.e., if there is a large tax differential between both locations within the firm). However, if transfer prices are high and the tax rate in the third market country is sufficiently close to the residence country’s tax rate, I show that the tax credit system is an optimal tax policy choice for both countries. From a policy perspective, the view that the tax exemption system is generally the best policy response if domestic firms’ competitiveness is a policy goal has to be qualified.

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Language(s): eng - English
 Dates: 2010
 Publication Status: Published in print
 Pages: 24
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Title: CESifo Working Paper
Source Genre: Series
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Publ. Info: München : Institut für Wirtschaftsforschung
Pages: - Volume / Issue: Nr. 3066 Sequence Number: - Start / End Page: - Identifier: -