Richard C. Sansing

Relationship-Specific Investments and the Transfer Pricing Paradox

The revised Treasury Regulations interpreting Internal Revenue Code Section 482 allow the use of profit-based transfer pricing methods, as well as the older methods based on prices from comparable transactions between independent parties. This paper compares the effects of price-based and profit-based transfer pricing methods on the allocation of taxable income in a model in which organization structure affects the level of relationship-specific investments made by vertically integrated groups and comparable independent firms. Analysis of the model shows that the price-based methods systematically allocates more taxable income to foreign subsidiaries and less to domestic parents than does the profit-based method.

Taxation of International Investment and Accounting Valuation

This paper develops a model of a firms foreign investment decisions and characterizes its optimal investment and repatriation strategies. It then derives the theoretical relation between firm value and the book value of the deferred tax liability associated with such investments or, if no liability is recognized for financial reporting purposes, the reduction in firm value associated with permanently reinvested foreign earnings. It shows that the valuation relevance of these items depends on whether the earnings are invested in operating assets or financial assets. It also shows the effects of a temporary tax holiday on firm value.

Financial Accounting Effects of Tax Aggressiveness: Contracting and Measurement

This study examines a setting in which a tax-reporting decision is delegated to a firms tax manager. Using financial accounting measures of tax expense to evaluate the tax manager allows the firm to efficiently attain the level of tax avoidance it prefers, despite the fact that the consequences of the tax-reporting decision will occur in the future. The study also examines how well two accounting measures of tax aggressiveness — cash taxes paid and the unrecognized tax benefit — distinguish between conservative and aggressive firms.

International Transfer Pricing

International transfer pricing determines how the worldwide income of a multinational enterprise is divided among countries for income tax purposes when transactions occur within the firm. This review examines economics, accounting, legal research, and tax practitioner literatures on international transfer pricing.

Using Bilateral Advance Pricing Agreements to Resolve Tax Transfer Pricing Disputes

We investigate the use of bilateral advance pricing agreements (BAPAs) to resolve transfer pricing disputes between a taxpayer and two tax authorities. BAPAs are designed to protect firms from double taxation while reducing expected compliance costs. We identify settings in which we expect BAPAs to arise and investigate the effect of the program on compliance costs. We show that agreements are more likely to arise when the amount of income potentially subject to double taxation is low and the difference in tax rates between the two countries is high. We also show that the BAPA program can increase compliance costs.

Data Truncation Bias and the Mismeasurement of Corporate Tax Avoidance

Loss firms are an economically significant and growing segment of the population of publicly traded corporations. Relatively little is known about the tax positions of loss firms because they are typically dropped from tax avoidance studies. We develop a new measure of corporate cash tax avoidance that is meaningful for all observations and reflects the extent to which a firm is tax-favored. We examine the extent to which inferences about corporate tax avoidance over the past twenty-seven years change when we examine the full population of firms, as opposed to a profitable and/or taxable subsample. In contrast to prior research findings, our results suggest that on average firms are tax-disfavored, by which we mean cash taxes paid exceed the product of the firm’s pre-tax book income and the statutory tax rate. In addition, many industries that appear to be tax-favored in profitable subsamples are tax-disfavored when examining the entire population. We also find that the extent to which firms are tax-disfavored is increasing over time and domestic firms are more tax-disfavored than multinationals.

Distribution Policies of Private Foundations

Nonprofit organizations are arguably the fastest growing and most dynamic part of modern market economies in democratic countries. This Handbook explores the frontiers of knowledge at the intersection of economics and the management of these entities. The authors review the role, structure and behavior of private, nonprofit organizations as economic units and their participation in markets and systems of public service delivery, assess the implications of this knowledge for the efficient management of nonprofit organizations and the formulation of effective public policy, and identify cutting edge questions for future research.

Income Shifting Using a Cost Sharing Arrangement

This study investigates the use of a cost sharing arrangement (CSA) by a multinational corporation (MNC) with domestically developed intangible property (IP) to shift the income attributable to the IP to low-tax foreign jurisdictions. Using a strategic tax compliance model, we identify three major effects that determine whether an MNC will use a CSA to develop the IP rather than develop the IP domestically: an operating intangible effect, an undervaluation effect, and an enforcement effect. First, we find that the MNC is more likely to use a CSA to develop the IP when the MNC has valuable domestic operating intangibles, such as a global brand. Second, the MNC is more likely to use a CSA if the nature of the IP development project allows the MNC to understate the fair market value of the IP. Third, the MNC is less likely to use a CSA if the tax authority can cost-effectively challenge the position and impose retroactive revaluations of the IP. We also compare the effects of the rules in the U.S. to the OECD transfer pricing guidelines used in most other countries.

Licensing Intellectual Property with Self-Reported Outcomes

The licensing of intellectual property (IP) is growing dramatically. A distinguishing feature of licensing versus standard sales is that license contracts often involve self-reporting; the licensor relies on the licensee to report the royalties owed. This study examines self-reporting licensing contracts using a game-theoretic approach to royalty compliance. A licensee’s accounting system generates a potentially inaccurate royalty report provided to the licensor. This self-reporting gives rise to demand for auditing by the licensor. We characterize the optimal royalty contract, accounting system choice by the licensee, and audit strategy choice by the licensor. We find that self-reporting either (a) limits the licensee’s rents, but lowers social welfare, or (b) enhances social welfare by facilitating use of the IP by the low-cost licensee instead of the high-cost licensor. As accounting system costs decrease or the gains from outsourcing increase, variable royalties based on self-reporting become even more desirable.

Corporate Governance in a Competitive Environment

We examine a firms corporate governance choices within a competitive environment. A firm can choose a passive board that delegates decision rights to the executive manager, or an active board that retains these rights. We characterize the equilibrium governance choices and find that there generally is no systematic relation between governance systems and firm performance. We discuss how the governance choice is affected by the rate of technological innovation, board expertise, the discount rate, the benefit of using new technology, and the cost of operating an internal control system. Finally, we analyze consequences of the Sarbanes-Oxley Act.