This paper analyzes the transfer pricing of multinational firms. We propose a simpleframework in which intra-firm prices may systematically deviate from arm’s lengthprices for two motives: i) pricing to market, and ii) tax avoidance. Multinational firmsmay decide not to avoid taxes if the risk to be sanctioned is high compared to thetax gap. Using detailed French firm-level data on arm’s length and intra-firm exportprices, we find that both mechanisms are at work. The sensitivity of intra-firm pricesto foreign taxes is reinforced once we control for pricing-to-market determinants. Mostimportantly, we find almost no evidence of tax avoidance if we disregard exports to taxhavens. Back-of-the-envelope calculations suggest that tax avoidance through transferpricing amounts to about 1% of the total corporate taxes collected by tax authoritiesin France. The lion’s share of this loss is driven by the exports of 450 firms to tentax havens. As such, it may be possible to achieve significant revenue increases withminimal cost by targeting enforcement.
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