TRANSFER PRICING AND PROFIT SHIFTING BEHAVIOR BY U.S.-BASED MNEs

Using data on bilateral intrafirm trade balances relative to the U.S., on aggregate and per industry, I find suggestive evidence of profit shifting behavior by U.S.-based multinational enterprises (MNEs) through transfer pricing. The dataset covers the intrafirm trade balances of the U.S. with 55 other countries for the period 1999-2011. The output provides mixed results concerning the effect of the statutory marginal tax rate of country i (hereafter: SMTRf) on the intrafirm trade balance between the U.S. and country i. There is no consistent evidence that supports the theory of tax induced profit shifting behavior, through transfer pricing, by underpricing U.S. exports to related parties in low tax jurisdictions and overpricing U.S. imports from related parties in low tax jurisdictions. On the one hand, some results show a clear positive relationship. A 1% increase of the SMTRf in country i results in a 0.9% increase in the intrafirm trade balance of the U.S. and country i. On the other hand, other results indicate a negative relationship between the SMTRf and the intrafirm trade balance per industry for the panel dataset used.