Group subsidiaries, tax minimization and offshore financial centres: Mapping organizational structures to establish the ‘in-betweener’ advantage

International business and public policy research have examined the techniques that multinational enterprises (MNEs) use to shift revenues to subsidiaries in offshore financial centres (OFCs) in order to minimize tax liability and arbitrage for their advantage. While study of such tax arbitrage strategies has looked to geographical locations and legal dimensions to better understand these strategies, it has ignored the structural and organizational relationship between MNEs and their subsidiaries. We define two distinct types of OFC-based corporate entities based on their location among and apparent control over other MNE affiliates: ‘stand-alone’ OFCs at the end of a chain of MNE subsidiaries; and ‘in-betweener’ OFCs with equity control over further entities and hence apparent flexibility to redirect profits to other MNE subsidiaries further down the chain. We hypothesize that when MNEs have in-betweener OFCs controlling a substantial share of overall MNE profits, this indicates greater MNE interest in aggressive tax planning (ATP). We then evaluate empirical support for our claims based on an ‘equity mapping’ approach identifying stand-alone and in-betweener OFCs in 100 of the largest MNEs operating globally. This study demonstrates that a key factor determining tax arbitrage is not the amount of value registered on OFC subsidiaries’ balance sheets, but rather the portion of the group’s operating revenues and net income controlled by OFC subsidiaries. National taxing authorities could benefit from tracking in-betweener OFC locations and behaviour to counter ATP strategies, decrease sovereign arbitrage, and increase MNE tax revenue

Negotiating Transfer Prices

Haake C-J, Martini JT. Negotiating Transfer Prices. Group Decision and Negotiation. 2013;22(4):657-680.We consider a team-investment setting in which transfer prices between two divisions are negotiable. Investments are made independently and simultaneously after the bargaining stage, i.e. with a given transfer price 'on the table'. Both divisions' investments jointly affect the sales price of the final product and total revenue. We analyze two transfer-pricing schemes and their corresponding bargaining problems. Both bargaining settings exhibit non-transferable utility because the transfer price not only allocates corporate profit but also affects corporate profit through the incentives it creates for the divisions' investment and quantity decisions. In particular, we discuss how concepts from bargaining theory can be use used to determine a 'fair' agreement concerning the transfer price. VHB-JOURQUAL-Ranking: