International fiscal competition, transfer pricing and multinational firms' strategies

Globalisation, commonly defined as the increasing market integration, also involves the expansion of multinational enterprises and foreign direct investment (FDI), mostly by such enterprises. This investment is influenced by the comparative tax regimes of host countries. This contribution involves consideration of two types of taxation effect. The first is the effect on the FDI decisions of multinational enterprises of international variations in taxation rates and rules. The second is their effect on intra-firm trade and pricing policy once an MNE establishes a foreign subsidiary. The first aspect involves international fiscal competition and the second entails transfer pricing. Indeed, manipulation of this transfer price is often used to minimise a multinational enterprise fiscal burden. It is argued that fiscal competition is desirable because it maintains welfare in host countries,by acting as a disincentive for transfer pricing manipulation.