in: Research School of International Taxation, Working Paper Series (RSIT-WP-09-2022)
Over recent years, a growing number of countries have enacted rules that require multinational enterprises (MNEs) to document their intra-firm trade prices and show that they are set as in third-party trade. The intention is to limit opportunities for strategic trade mis-pricing and profit shifting to lower-tax affiliates within the multinational group. Using the introduction of the French transfer price (TP) documentation requirements in 2010 as a testing ground, we show that the rules exert real effects and shape MNEs’ investment behavior. Affected businesses significantly lower their investments in France. Moreover, there are cross-border effects on affected firms’ foreign group locations in low-tax countries, where investments equally decline. Our analyses show that investment responses are largely driven by increases in firms’ effective tax costs; there is no indication that MNEs respond to compliance burdens associated with the laws.