Note on tax enforcement and transfer pricing manipulation

TL;DR

This paper introduces a formal framework distinguishing endogenous and exogenous factors in tax penalties, demonstrating that increased enforcement and penalties reduce income shifting.

Contribution

It provides a novel formal demonstration linking enforcement and penalties to decreased income shifting through component segregation.

Findings

Enforcement and penalties are negatively related to income shifting.

Segregation of penalty components clarifies their effects.

Formal demonstration supports policy implications.

Abstract

This note proposes the segregation of independent endogenous and exogenous components of tax penalty probability to introduce a formal demonstration that enforcement and tax penalties are negatively related with income shifting. JEL F23; H26.