Estimating the Knowledge-Capital Model of the Multinational Enterprise: Comment by Bruce A. Blonigen, Ronald B. Davies and Keith Head. Published in volume 93, issue 3, pages 980-994 of American Economic Review, June 2003

This paper analyzes the transfer pricing of multinational firms. Intrafirm prices may systematically deviate from arm’s-length prices for two motives: pricing to market and tax avoidance. Using French firm-level data on arm’s-length and intrafirm export prices, we find that the sensitivity of intrafirm prices to foreign taxes is reinforced once we control for pricing-to-market determinants. Most important, we find no evidence of tax avoidance if we disregard tax haven destinations. Tax avoidance through transfer pricing is economically sizable. The bulk of this loss is driven by the exports of 450 firms to ten tax havens.