One Set or Two Sets of Books: The Impact of audStrategic Tax Auditor

摘要

Using a game theoretical setting, this paper studies how a multinational company's (MNC) choice of using one set (OSB) or two sets of books (TSB) is affected by a strategicallyudacting tax auditor (TA). First, a divisionalized MNC with a producing division in audlow tax country and a selling division in a high tax country chooses either OSB or TSB.udWith OSB, the unique transfer price coordinates the quantity decision and determines the tax payments. With TSB, two transfer prices are used for both tasks. Second, a TA mayudaudit the MNC's transfer prices.udIt turns out that the TA's bargaining power and his personal audit costs critically influenceudthe MNC's transfer pricing decision. For a low bargaining power and low audit costs,udthe MNC keeps OSB with positive probability. When the TA's bargaining power is high,udthe negotiation benefits from using a single transfer price are outweighed by the costs ofuda reduced flexibility. Then, the MNC keeps TSB with either tax aggressive or compliantudreported transfer prices. In addition, a raise in the tax difference induces less tax aggressiveudbehavior. Intuitively, tax aggressiveness should be even more attractive in this case. Thisudintuition is not true in our setting since the TA's audit probability increases and, thus, makesudprofit shifting less attractive.