Article Type: Original Article

Transfer Pricing: Strategies, Practices, and

Tax Minimization*

KENNETH J. KLASSEN, University of Waterloo

PETRO LISOWSKY, University of Illinois at Urbana-Champaign and Norwegian Center for Taxation

DEVAN MESCALL, University of Saskatchewan

Corresponding Author:
Kenneth Klassen
School of Accounting and Finance
University of Waterloo
200 University Avenue West
Waterloo, ON, Canada N2L 3G1
kklassen@uwaterloo.ca
(519) 888-4567 x. 38550

*Accepted by Lillian Mills. The authors thank Tax Executives Institute (TEI) for distributing our survey and TEI
members for their participation. Special thanks for the cooperation and support of Timothy McCormally and Mary
Fahey. The authors thank Marc Alms, Andrew Bauer, Muris Dujsic, Christy MacDonald, Paula Moore, and Leslie
Robinson for assistance in developing our survey instrument; Peter Barnes, Amy Dunbar, Michelle Hanlon, Becky
Lester, Lillian Mills (editor), two anonymous reviewers, conference participants at the 2013 American Taxation
Association Mid-Year Meeting, 2013 Internal Revenue Service Research Conference, and workshop participants at
Boston University, University of Iowa, and the Max Planck Institute for Tax Law and Public Finance for helpful
comments; and Stephen Powers for excellent research assistance. Kenneth Klassen is the KPMG Professor of
Taxation and acknowledges the generous support of the Robert Harding Research Leadership Fellowship at the
University of Waterloo; Petro Lisowsky acknowledges the generous support of the MIT Sloan School of
Management, as well as the PricewaterhouseCoopers Faculty Fellowship at the University of Illinois at Urbana-
Champaign; and Devan Mescall acknowledges the generous support of the Edwards Scholar Fellowship at the
University of Saskatchewan.

Transfer Pricing: Strategies, Practices, and Tax Minimization

Abstract

Using a survey of tax executives from multinational corporations, we document that some firms set their transfer

pricing strategy to minimize tax payments, but more firms focus on tax compliance. We estimate that a firm

focusing on minimizing taxes has a GAAP effective tax rate that is 6.6 percentage points lower and generates about

$43 million more in tax savings, on average, than a firm focusing on tax compliance. Available COMPUSTAT data

on sample firms confirm our survey-based inferences. We also find that transfer pricing-related tax savings are

greater when higher foreign income, tax haven use, and R&D activities are combined with a tax minimization
This is an Accepted Article that has been peer-reviewed and approved for publication in the
Contemporary Accounting Research, but has yet to undergo copy-editing and proof
correction.Please cite this article as an “Accepted Article”; doi: 10.1111/1911-3846.12238
This article is protected by copyright. All rights reserved
strategy. Finally, compliance-focused firms report lower FIN 48 tax reserves than tax-minimizing firms, consistent

with the former group using less uncertain transfer pricing arrangements. Collectively, our study provides direct

evidence that multinational firms have differing internal priorities for transfer pricing, and that these differences are

strongly related to the taxes reported by these firms.

Keywords: transfer pricing, multinational tax planning, tax minimization, tax compliance

JEL Descriptors: H25, H26, H32, K34, M41

1. Introduction

With the cooperation of the Tax Executives Institute (TEI), we conduct an extensive field survey of multinational

corporate tax directors to create a detailed account of how differences in tax departments’ transfer pricing strategies

and practices are related to tax minimization. In doing so, we document that companies emphasize tax compliance or

tax minimization in setting their transfer prices.1 Furthermore, we estimate the extent to which firms’ focus on tax

compliance or minimization using transfer prices is related to observable tax outcomes, whether through the

reported GAAP effective tax rate (ETR) or tax reserves accrued under Financial Interpretation No. 48 (FIN 48)

(FASB 2006).

Hirshleifer (1956, 172) defines transfer pricing as “pricing the goods and services that are exchanged

between [autonomous profit-center divisions] within a firm.” However, more recently within the accounting,

economics, and law literatures, interest in transfer prices has focused on them as a tool for multinational firms to

reduce global taxes. For example, Hassett and Newmark (2008, 208) describe tax-motivated transfer pricing as “the

practice of multinational corporations of arranging intrafirm sales such that most of the profit is made in a low-tax

country.” At the same time, global tax authorities have raised concern about the loss of tax revenues that may be the

result of abusive transfer pricing (OECD 2013). In 2010, the U.S. Internal Revenue Service (IRS) announced a

1
Like prior research (e.g., Higgins, Omer, and Phillips 2015), we infer a firm’s strategy from observable characteristics;
however, unlike Higgins et al. who rely on public data, we directly ask tax directors their goals to create a proxy for the firm’s
transfer pricing strategy. We describe “tax minimization” as the strategy of reducing taxes, although firms do not literally reduce
taxes to zero. Discussions with tax advisors and tax managers reveal that companies refer to “tax minimization” rather than “tax
avoidance” or “after-tax wealth maximization.” We describe “tax compliance” as firms seeking to avoid disputes with the tax
authorities. We compare “tax minimization” to “tax compliance” because very few respondents indicate that they seek both
corresponding goals.
greater focus on transfer pricing to address diminishing tax revenues, including creating a new Director of Transfer

Pricing position (Ossi and Shepherd 2010).

U.S. Internal Revenue Code section 482 defines the appropriate transfer pricing approach for U.S. tax

purposes and governs the IRS’s authority to scrutinize transfer-pricing practices. It requires companies to use the

“arm’s-length principle” in setting prices; that is, set a price as though the transaction occurs between unrelated

parties for similar goods under similar terms. However, in practice it can be difficult to estimate an “arm’s-length”

price on intrafirm sales. Therefore, a range is developed using a variety of comparable companies (see De Simone

2015). To avoid disputes with the tax authorities, some firms choose transfer prices towards the less tax-advantaged

end of the range, while other firms concerned with reducing overall cash tax payments might choose a price at the

more aggressive end of the range.

The degree to which multinational corporations use transfer prices to reduce corporate taxes is not known.

Because the “arm’s-length” price is often more of a concept than a fixed value, the standard on which to measure the

aggressiveness of any observed transfer price is rarely defined. Furthermore, the proprietary nature of transfer prices

has generally forced researchers to use data that allow for only indirect inferences about firms’ operations and

internal transactions. In economics, Gordon and Hines (2002) acknowledge that studies examining tax-motivated

intrafirm trade provide only indirect evidence that transfer prices are used as a tool for tax minimization. In

accounting, Jacob (1996) and Beuselinck and Deloof (2014) provide indirect evidence of a negative association

between intrafirm trade volume and tax incentives for multinationals, consistent with transfer pricing being used as a

tool for reducing taxes. Clausing (2003) improves on Jacob (1996) by employing Bureau of Labor Statistics data on

international trade that identifies intrafirm transactions. She documents that the prices charged are consistent with

tax-motivated adjustments.

Moreover, broader views of tax planning within corporate strategy (e.g., Scholes, Wolfson, Erickson,

Hanlon, Maydew, and Shevlin 2014) suggest that a one-dimensional focus on taxes ignores other uses of transfer

prices, such as supporting decentralization and coordination (Baldenius, Melumad, and Reichelstein 2004), or that

other tax or nontax costs can more than offset the tax benefits from tax planning through transfer prices. For
example, Blouin, Robinson, and Seidman (2012) show that multinational firms’ intrafirm trading behavior is not

always consistent with strictly income tax minimization.

To overcome some of the challenges in identifying tax-related transfer pricing strategies and practices, we

ask 219 tax directors an extensive series of questions on their transfer pricing strategies and practices. Of primary

interest to our study, 99 directors indicate their firms’ goals when evaluating transfer pricing alternatives. We

particularly focus on the goals of avoiding disputes with tax authorities and cash taxes as indicative of the transfer

pricing strategies of tax compliance and tax minimization, respectively. With other data available to extensively

analyze up to 64 firms, we relate firms’ responses to their demographic, tax, and financial reporting factors to test

attributes related to the choice of goal, and whether the variation in transfer pricing goals is related to tax outcomes.

First, we document firms’ transfer pricing goals and analyze differences in firm attributes that relate to goal

selection. We find that more firms select “lack of disputes with tax authorities” as a goal (49 percent) compared to

“cash taxes paid” (41 percent), a notable observation given the prominent focus in the literature on multinational

corporations using transfer prices to minimize global taxes. We predict that firms select a tax minimization transfer

pricing strategy when they have lower costs of using transfer prices for tax avoidance. Our results are consistent

with this prediction: companies that emphasize cash taxes paid, rather than lack of disputes with tax authorities, have

less audit committee scrutiny of tax issues, use separate prices for tax and cost accounting (known as decoupling),

are private, non-manufacturing, more international, have more R&D, and spend more of their budgets on tax

planning.

Second, we examine the effect of the goal selection on observable tax outcomes. Firms that focus on

minimizing taxes through transfer pricing have, on average, GAAP ETRs that are 6.6 percentage points lower than

firms that focus on compliance. This estimate translates into about $43 million in fewer taxes paid, on average, for

firms focusing on tax minimization.

Because the GAAP ETRs in our main survey tests are self-reported, and thus accuracy or bias might be a

concern, we recalculate ETRs using available COMPUSTAT data for 40 public firms that voluntarily identified

themselves in our survey. Confirming our estimates, we find that, relative to firms with a transfer pricing goal of
lack of disputes with tax authorities, firms with a goal of cash taxes paid have, on average, lower one- and three-year

GAAP and cash ETRs of between 6 and 14 percentage points. Our results indicate that tax-related transfer pricing

strategies are linked to material differences in tax rates, and that our survey inferences may generalize.

Third, we investigate the extent to which opportunities to reduce taxes vary across firms with different

strategies. We do so by including interactions of the variables for tax goals with common measures of international

tax avoidance opportunities—foreign income, tax haven use, and research and development (R&D) activities. Prior

literature, described below, generally links these three characteristics to greater international tax planning but does

not directly test the role of transfer pricing in reducing ETRs across these different opportunities. We find that the

decreasing effect on ETRs of foreign income, tax haven use, and to a lesser extent, R&D, is intensified for cash tax

paid-goal firms, relative to firms trying to avoid transfer-pricing disputes. This set of results is the first to directly

document a relation between transfer pricing strategies and tax savings for firms with favorable opportunity sets.

Finally, we examine firms’ FIN 48 tax reserves to infer the strength of tax positions underlying the transfer

pricing arrangements of tax minimization and compliance firms. We examine the tax reserve because Towery

(2015) reports that transfer pricing is the second largest area of uncertainty (after the R&D tax credit) disclosed on

the IRS’s Schedule UTP.2 We find that firms that identify a goal of lack of disputes with tax authorities report

significantly lower FIN 48 tax reserves relative to firms with a goal of cash taxes paid, consistent with the former

group of firms claiming fewer transfer pricing positions that have weak underlying facts.

Our study contributes to the accounting and economics literatures by surveying multinational corporations’

tax departments to more deeply investigate the links between transfer pricing and tax choices. Our paper offers new

research into the internal workings of multinational firms, which should affect how transfer prices are implemented

in light of a firm’s overall business strategy. Our research extends Robinson, Sikes, and Weaver (2010) who use

2
For reporting periods after December 15, 2006, firms with uncertain tax positions are required to apply FIN 48’s two-step
process to recognize and measure tax reserves (FASB 2006). In concept, the tax reserve liability arises from tax benefits, which
due to their uncertain nature, are not immediately recognized in the financial statements as a reduction to tax expense. Uncertain
positions are those with an increased likelihood that the position will be disallowed upon audit by the tax authorities. See Mills,
Robinson, and Sansing 2010; Lisowsky, Robinson, and Schmidt 2013; and Beck and Lisowsky 2014. Starting in 2010, Schedule
UTP is a disclosure required by the IRS of firms’ U.S. federal tax uncertainties that underlie the FIN 48 tax reserve reported in
firms’ financial statements. Thus, we anticipate that transfer pricing uncertainties will be similarly important in FIN 48 tax
reserves.
survey data to identify companies that evaluate their tax departments as either a cost center or a profit center. This

classification may be related to the departments’ goals of avoiding tax disputes or cash taxes paid, respectively.

However, our metric is a more direct test of internal incentives surrounding transfer prices in particular.

We highlight several caveats to our survey method. First, to reduce collection costs and improve the

response rate, we solicited responses from tax departments in coordination with TEI. We acknowledge that TEI

lobbies on behalf of its members on transfer pricing and other tax issues. Because our survey request was directed

through TEI, its members’ responses might be biased. However, TEI did not collect, preview, edit, or have access to

the survey responses; they were collected directly by one of the authors using an online interface. Second, where

possible, we triangulate the survey responses using publicly available COMPUSTAT data, as well as TEI population

estimates collected in its 2005 mandatory membership survey. Using different data sources helps establish both the

internal and external validity of our measures and inferences. Finally, each question was voluntary; respondents

could skip questions. Each of these safeguards follows Graham et al. (2010, 2011, 2014), who also solicit survey

responses from TEI members on tax and financial reporting issues. Overall, despite some disadvantages, using the

TEI’s help is currently the best method available to survey many firms on their transfer prices, internal tax goals,

practices, and other characteristics not otherwise publicly reported.

Our paper proceeds as follows. Section 2 discusses prior research and develops our main hypothesis.

Section 3 describes our survey method, sample, and measurement of tax compliance and tax minimization. Sections

4 and 5 report the results of our determinants and consequences models, respectively, using the survey data. Section

6 reports our results using COMPUSTAT data, including cross-sectional and FIN 48 tax reserve analyses. Section 7

concludes.

2. Background and hypothesis development

Prior research

An extensive literature on multinational tax planning has explored whether corporations avoid taxes by shifting

income from high-tax to low-tax jurisdictions (see below and Dharmapala 2014 for a review). However, while

transfer prices are often asserted to be the mechanism to shift income, direct evidence on the role of transfer prices

in global tax reduction remains elusive (Clausing 2003 is a notable exception). We aim to fill this void in the

literature.
 Klassen, Lang, and Wolfson (1993) provide evidence of geographical income shifting in response to tax

rate changes in the United States, Canada, and Europe. Examining 191 U.S. multinational corporations, they find

evidence consistent with income shifting from higher-tax to lower-tax jurisdictions when the appropriate tax

incentives materialize. However, their data do not allow for testing directly the mechanism firms use to achieve

these results. Using financial statement disclosures under SFAS 14, Jacob (1996) finds that the magnitude of

income shifting is related to the volume of intrafirm international sales and regional differences in tax rates. By

focusing on sales volume, he infers that transfer prices are a likely mechanism for the income shifting found in

Klassen et al. (1993).3 Mills and Newberry (2004) explore the possibility that financing policies can also achieve

income shifting. Using financial and tax return data, they find evidence consistent with foreign multinationals with

relatively low foreign tax rates using more debt in their U.S. subsidiaries than those with relatively high foreign tax

rates.

Dyreng and Lindsey (2009) and Klassen and Laplante (2012a, b) show relations that are consistent with

transfer prices, in conjunction with tax havens and foreign operations, being used to shift income to low-tax

jurisdictions, but their evidence is also indirect. In exploring loss firms, De Simone, Klassen, and Seidman (2015)

find evidence consistent with firms responding to loss affiliates by reporting higher profits than would be expected,

particularly as statutory tax rates rise. Hopland, Lisowsky, Mardan, and Schindler (2015) use Norwegian tax return

data on intrafirm payments and infer that transfer prices, especially on intangible property, are a flexible tool for

shifting income to a loss affiliate.

More directly related to transfer pricing issues, Bernard, Jensen, and Schott (2006) examine U.S. exporters’

prices to unrelated and related customers. They document prices for the former that are relatively greater when

goods are sold to countries with lower corporate tax rates or higher import tariffs. Towery (2015) reports that the

second-largest area of uncertainty that underlies the FIN 48 tax reserve (as disclosed on the IRS’s Schedule UTP in

2010) is related to international transfer pricing. Using the setting of mergers and acquisitions, Mescall and Klassen

(2015) find that stricter transfer pricing enforcement across countries adversely impacts cross-border acquisition

premia, suggesting that reducing the ability to select advantageous transfer prices for tax purposes diminishes firm

value.

3
For related studies in the economics literature, see Grubert and Mutti (1991), Hines and Rice (1994), Hines (1997), Clausing
(2003, 2006), Mills and Newberry (2004), and Huizinga and Laeven (2008). In the accounting literature, also see Harris (1993)
and Collins, Kemsley, and Lang (1998).
 De Simone (2015) provides a detailed analysis of the institutional details surrounding transfer prices under

the OECD “arm’s-length” standard, including the potential methods and flexibility afforded to taxpayers and

administrators. She notes that the difficulty in identifying a truly comparable non-arm’s-length price in many

settings has led the OECD transfer pricing guidelines to specify a hierarchy of acceptable methods to determine the

price. She asserts that the widespread adoption of International Financial Reporting Standards (IFRS) increased

firms’ flexibility to set transfer prices. She finds that IFRS adoption at the affiliate level increases the responsiveness

of parent firms to shift income for tax reasons.

Because publicly available archival data cannot directly identify the mechanism for shifting income to

reduce global taxes (Donohoe, McGill, and Outslay 2012), the evidence in many studies is indirect, and the

techniques that lead to the observable outcomes must be inferred. In response to these challenges, researchers are

using survey methods. Specific to income shifting, Blouin, Krull, and Robinson (2012a) and Blouin et al. (2012b)

use survey data from the Bureau of Economic Analysis (BEA) to identify intrafirm trade between U.S. parents and

their foreign affiliates. However, data on which firms achieve their income shifting to a greater or lesser extent, as

well as why or how, are not available.

Other survey papers in the tax literature do not study transfer pricing, but are relevant to our approach.

Slemrod and Blumenthal (1996), with the help of TEI, examine the tax compliance costs of large corporations in

1992. They find that the costs to comply with federal and sub-federal income taxes amounts to over $2 billion. 4

Mills, Erickson, and Maydew (1998) use these same survey data to explore factors giving rise to firms’ differential

investments in tax planning. Graham et al. (2010, 2011, 2014) survey TEI executives regarding deliberations on

earnings repatriation, tax planning, and location of foreign operations and its effect on tax expense. They find that

financial reporting costs are a major consideration in these decisions.

Robinson et al. (2010) use a 1999 Ernst & Young survey of 205 Chief Financial Officers of Fortune 1000

companies. They find that firms that evaluate their tax departments as profit centers report lower GAAP ETRs than

firms that evaluate their tax departments as cost centers. While assessing the tax department as a profit center versus

4
Also see Slemrod and Sorum (1984) and Blumenthal and Slemrod (1992, 1995) for survey estimates of the tax compliance
burdens on individuals and foreign-source income reporting.
cost center does not necessarily relate directly to the measurement of a firm’s transfer pricing success in particular, it

would be consistent for a tax department evaluated as a profit center to focus on cash taxes paid (and have a strategy

of tax minimization), rather than avoiding disputes with the tax authority (and have a strategy of tax compliance).

Overall, the goals, approaches, and motivations behind these surveys are broadly similar to ours: the

paucity of traditional archival data—despite the subject matter’s importance—requires researchers to employ survey

methods to obtain direct evidence from inside corporate tax departments. We contribute to the literature by

conducting a survey study focused on directly identifying corporate tax considerations surrounding transfer prices.

In doing so, we uncover differing strategies that firms apply to their transfer pricing activities and measure the

observable tax outcomes that flow from these strategies.

Hypothesis development

In meeting their broader business strategies, firms trade off tax costs with other costs (Scholes et al. 2014; Higgins,

Omer, and Phillips 2015). Shackelford and Shevlin (2001) and Hanlon and Heitzman (2010) summarize a variety of

settings in which the trade-off between taxes and other business priorities leads to predictable and observable

differences across firms or time. Among these, a stream of literature explores the tax aggressiveness of corporations

in an effort to identify factors that lead some firms to achieve lower tax rates or payments.

As described above, because transfer prices are based on a conceptual standard—there is no precise arm’s-

length price for traded goods in most cases—there are significant costs and benefits to adjusting intrafirm prices to

achieve desired tax outcomes. If a firm sets a goal of minimizing tax payments in an important area of the firm’s tax

planning like transfer pricing, it can lead to reporting lower taxes overall. This rationale leads to our hypothesis:

HYPOTHESIS. Firms that measure transfer pricing success based on cash taxes paid will have lower
effective tax rates than firms that measure success based on lack of disputes with tax authorities.

While prior studies generally acknowledge that firms face an optimal level of tax avoidance beyond which

it is not wealth-maximizing for the firm (Chen, Chen, Cheng, and Shevlin 2010; and Armstrong, Blouin, Jagolinzer,

and Larcker 2015), the literature has not considered that firms may face different costs of defending their tax

positions to other parties (e.g., audit committees or tax authorities). Thus, it is unclear whether a goal of tax
compliance in a complex area of tax law like transfer pricing will necessarily be related to higher tax payments. 5

Besides the question of whether an observable relation exists, the magnitude of any relation is also valuable to the

ongoing tax policy debate (e.g., OECD 2013; Dharmapala 2014).

Beyond the issue of how the strategy of the tax function can affect tax payments, the effects may extend to

other observable tax outcomes. Because the unrecognized tax benefit (UTB) liability, or the tax reserve, accrued

under FIN 48 measures tax positions claimed by the firm with weaker underlying facts (Mills, Robinson, and

Sansing 2010; and Lisowsky, Robinson, and Schmidt 2013), differences that result from the selected tax strategy are

likely to also be observable in the UTB. Because Towery (2015) finds that transfer pricing issues represent a

significant portion of uncertain tax positions reported in private disclosures to the IRS, we anticipate that firms with

a strategy of minimizing taxes via transfer pricing will report a higher UTB. Similarly, firms with a strategy of tax

compliance (i.e., that emphasize a lack of disputes with tax authorities) are more likely to choose transfer prices with

more certainty, thus requiring lower FIN 48 tax reserves than firms seeking to minimize taxes. We do not formally

hypothesize this expectation, although it is consistent with the rationale underlying our main hypothesis.

3. Method

Survey sample

Our survey instrument is designed to gather details of transfer pricing strategies and practices of U.S.-based

multinational firms. While we do not directly ask about the strategy of the tax function with regard to transfer

pricing, we do ask about the internal objectives, or goals, for transfer pricing within the tax department. This

approach is broadly similar to Higgins et al. (2015), although they employ publicly available data on outcomes to

infer the internal strategy. Transfer pricing practices are the inner workings of the tax department, such as its budget,

resources spent on tax planning, and the experience of the tax director in transfer pricing matters.

5
Consistent with positive theory (Scholes et al. 2014), we assume all firms behave optimally. Our analysis attempts to better
understand the implications of the choices. Therefore, even if the goal of tax compliance results in higher overall tax payments
because the current and potential costs are not fully captured in the ETR, the behavior may still be optimal because the firm’s
strategy leads it to maximize expected wealth using other mechanisms.
 The survey contains 114 questions.6 A preliminary version was reviewed by several academic researchers,

a TEI representative, two transfer pricing partners from different international accounting firms, and the tax director

of a multinational firm. The survey was conducted online with an electronic mail request for participation by TEI

leadership to tax executives at 2,700 multinational members firms on October 27, 2010.7 A second request followed

42 days later. We received responses from 219 tax executives, resulting in a response rate of 8.1 percent. 8 The

response rate is comparable to previous surveys of senior executives, including the 8.8 percent response rate in

Graham and Harvey (2001) and 9 percent in Slemrod and Venkatesch (2004), although it is lower than the

exceptional 26.5 percent rate in Graham et al. (2011).

Participation in the survey was optional.9 Therefore, we evaluate whether our inferences suffer from non-

response bias. We test for evidence of a non-response bias by comparing early and late responses because late

responses proxy for non-responses (Wallace and Mellor 1988; Oppenheim 1992; Graham and Harvey 2001; and

Elliott, Hodge, and Jackson 2008). Results show no statistical difference in the early versus late respondents in terms

of ETR, transfer pricing strategy, size, industry, or geography, suggesting the effect of any non-response bias is

likely minimal.

We compare our 219 respondents to publicly traded multinational firms in COMPUSTAT and the overall

population of TEI member firms as obtained by their mandatory 2005 membership survey. Mellor and Wallace

(1988) suggest that such comparisons can help provide evidence on the extent to which the survey respondents are

representative of the overall population of firms. For the COMPUSTAT firms, we determine two samples. The

multinational sample has non-missing foreign pretax income (PIFO), and the global sample has foreign pretax

income of at least 10 percent of total pretax income (in absolute values). Table 1 compares the size and industry of

our sample to the three other groups. Our sample of respondents is more representative of TEI membership and the

6
The survey instrument was designed to collect data on several issues around the taxation of multinationals. Transfer pricing
strategies was only one of these issues. The entire survey instrument is available online at
http://www.edwards.usask.ca/faculty/Devan%20Mescall/Research.aspx.
7
TEI sent the invitation to its membership and requiring confidentiality of the resulting data; TEI provided no funding or other
benefits to the researchers and imposed no restrictions on the use of the data.
8
Of these 219 respondents, 40 percent identified themselves as the firm’s Tax Director, 39 percent as Vice President of Tax or
Chief Tax Officer (CTO), 19 percent as Tax Manager, and 2 percent as Chief Financial Officer.
9
To allow the researchers to ask the questions of interest and to insure the responding members of TEI felt comfortable
responding, it was agreed that all questions would be optional and members should feel free to skip any questions. As a result, the
response rate varies across questions.
global COMPUSTAT corporations, than of multinational COMPUSTAT corporations, as expected. For example,

we find that 17 percent and 4 percent of our survey sample fall in the largest two revenue categories of $10 to $50

billion and greater than $50 billion, respectively, while the 2005 TEI survey, COMPUSTAT global companies, and

COMPUSTAT multinational companies report 11 and 2 percent, 10 and 3 percent, and 7 and 2 percent,

respectively, in these categories. Given the passage of time (e.g., growth) since 2005, and our focus on multinational

firms large enough to have a tax executive, it is reasonable that our responses come from larger firms than the

overall TEI membership or the COMPUSTAT samples.

We find the industry distribution of our survey respondents also more comparable to the TEI membership

and the COMPUSTAT global firms than the COMPUSTAT multinational firms. Of the five most common

industries of our respondents (manufacturing, wholesale and retail, information and telecommunications, financial,

and professional services) only two were in the top five of the COMPUSTAT multinational sample (manufacturing,

and information and tele-communications), while four were in the top five of the TEI membership (all except

information and telecommunications), and the COMPUSTAT global sample (all except financial). We conclude that

the survey respondents are not dissimilar to COMPUSTAT firms, although they are more similar to the broad TEI

membership and COMPUSTAT firms with significant foreign income.

Although we could not identify any obvious bias stemming from this difference or the somewhat larger

respondent firms, we cannot conclusively rule out a bias of unknown severity that may affect our inferences. As a

result, we interpret our findings with caution and perform additional tests later using publicly available data from

COMPUSTAT to evaluate the internal and external validity of our measures and inferences.

Measuring transfer pricing strategies using survey data

We focus our study on a survey question about the metrics that corporate tax directors use to measure the success

of their transfer pricing practices. To identify firms’ goals, we asked tax directors, “How do companies assess

efficiency of their own transfer pricing practice?”10 They could check as many of the available responses that

10
The purpose of the question is to understand which metrics the firm uses to assess the overall performance of its transfer
pricing practices. Reviews of tax practitioner publications, as well as discussions with practitioners about transfer pricing
practices and decisions, consistently identify “efficiency” as a major aspirational outcome of transfer pricing practices by
applied. Of the 99 responses received to this question, the prevalence of the metrics used for transfer pricing

efficiency are “success in disputes with tax authorities” (72 percent), “overall ETR” (59 percent), “lack of disputes

with tax authorities” (49 percent), “FIN 48” (46 percent), and “cash taxes paid” (41 percent). 11 The most common

response captures whether the department set the transfer price in a manner that could be successfully defended,

regardless of its uncertainty. The “overall ETR” is commonly cited as an important goal because it is a common

externally observable performance measure of the tax department (Armstrong, Blouin, and Larcker 2012). However,

neither of these responses capture whether the tax department is motivated in particular to reduce cash tax payments

or focus on tax compliance.12

After these two most commonly identified goals, tax compliance (i.e., “lack of disputes with the tax

authority”) and financial reporting outcomes (i.e., “FIN 48”) have greater importance than tax minimization (i.e.,

“cash taxes paid”) for assessing transfer-pricing efficiency. The tax directors’ responses illustrate that although tax

minimization via lower cash taxes plays a role in transfer pricing for some firms, it is often subsumed by other,

potentially more salient business and reporting objectives. This result is interesting given the focus of extant

research on transfer pricing being used as a tool to only minimize global taxes.

Central to our tests, we characterize firms that indicate they assess their transfer pricing efforts based on

“cash taxes paid” as having a strategy of tax minimization, rather than firms that indicate they assess their transfer

prices using “overall ETR.” We make this distinction because prior research has shown that GAAP ETR can reflect

both tax minimization and financial reporting incentives (Dhaliwal, Gleason, and Mills 2004). From our data, 45

percent of respondents that indicated they use “overall ETR,” do not indicate that consider cash taxes paid. Thus,

“cash taxes paid” provides a more focused proxy for a strategy of tax minimization. 13

considering both costs and benefits (Eden 2001; Bevacqua and Klopfer 2013; Schoenborne 2014; Baker-Tilly International
2014). Therefore, our instrument uses the term “efficiency” to convey the common concept of the firm’s optimal balance between
costs (e.g., administrative, regulatory, tax, reputation, etc.) and benefits (e.g., tax savings and tax certainty) of transfer pricing
practices. Response rates were comparable to questions directly before and after this question, suggesting that using this term did
not deter tax directors from responding to our questions. However, we cannot rule out the possibility that some respondents
interpreted the term “efficiency” differently from our intended use, which would add noise to our analysis.
11
Other potential responses, with less than 20 percent of selecting them, are “foreign ETR,” “number of challenges by tax
authorities (more is worse),” “number of challenges by tax authorities (more is better),” and “other (please specify).”
12
We do not view “success in disputes” as a measure of the firm’s desire to achieve tax compliance at the cost of more
aggressive planning. Of those indicating “success in disputes,” 51 percent did not choose “lack of disputes with tax authorities,”
while 49 percent did. In addition, “overall ETR” differs from both “cash taxes paid” and “FIN 48.” Of those choosing “overall
ETR,” 55 percent chose “cash taxes paid” and 52 percent chose “FIN 48,” while the remaining did not.
13
Notwithstanding our belief that “cash taxes paid” is a more precise proxy for the strategy to tax minimization, we obtain
similar inferences for our main hypothesis using “overall ETR” as a goal instead.
 We use these responses to create two mutually exclusive variables. If the company assesses its transfer

pricing success based on “cash taxes paid” but not “lack of disputes with tax authorities,” we code

CASH_TAX_GOAL equal to one; zero otherwise. Similarly, if the company assesses its transfer pricing success

based on “lack of disputes with tax authorities” but not “cash taxes paid,” we code COMPLIANCE_GOAL equal to

one; zero otherwise.14

Due to data limitations, our main tests of the hypothesis employ 64 responses. 15 Of these responses, 17

firms, or 26.6 percent, report that cash taxes are an important metric in assessing transfer pricing efficiency

(CASH_TAX_GOAL), while 23 firms, or almost 36 percent of the sample, state that a lack of disputes with tax

authorities (COMPLIANCE_GOAL) is the key metric. We find that only 10 firms (15.6 percent of the sample) report

that both goals are important, while 14 firms (the remaining 22 percent of the sample) report that neither goal is

important. Thus, in total, 27 firms (17 + 10), or 42 percent of the sample, seek transfer-pricing efficiencies through

cash taxes while 33 firms (23 + 10), or 52 percent of the sample, seek to avoid disputes with tax authorities. These

proportions are similar to the broader set of responses reported above.

4. Determinants of firms’ transfer pricing strategies

Empirical model

Although our hypothesis focuses on the tax outcomes of adopting different transfer pricing strategies, we begin our

analysis by exploring the determinants of these strategies. We expect that the probability of a firm choosing a

strategy focused on reducing taxes will be decreasing in the presence of greater nontax costs faced by, and

increasing in opportunities for tax benefits for, the firm. We use the survey data to estimate the following probit

model:16

14
Note that because the effect of the two goals is expected to be opposite, specifying neither or both goals should yield similar
effects. We examine this issue in our tests of tax outcomes, reported in section 5. All inferences hold using alternative
specifications that consider non-mutually exclusive responses.
15
Of the 99 respondents who answered the question on goals of the tax department with respect to transfer pricing, we excluded
19 observations that did not provide their ETR or their company information so we could compute their ETR from
COMPUSTAT. Missing data on other regression variables resulted in the loss of an additional 16 firms. The 64 observations we
use have very similar distributional character to the 219 reported in Table 1.
16
Our ability to reliably use a two-stage regression is limited due to our small sample size.
CASH_TAX_GOAL = 0 + 1 AC_SCRUTINY + 2 DECOUPLED_TP + 3 MFG
+ 4 HIGH_PLANNER + 5 HIGH_INTL + 6 R&D
+ 7 UNDERFUNDED_TP + 8 PUBLIC + 9 ENFORCEMENT +  (1)

CASH_TAX_GOAL is defined above. Other variables are defined as follows (also see the Appendix):

AC_SCRUTINY One if the tax director indicates that “Transfer Pricing” or “Tax Risk” in their response
to the question “What is the most important tax issue to your audit committee?”; zero
otherwise.

DECOUPLED_TP One if the tax director indicated “Yes” to the question “To facilitate the many influences
on determining a transfer price, do companies calculate different transfer prices for
different purposes within the company (i.e., calculate one price for tax purposes and
another for assessing subsidiary performance etc.)?”; zero otherwise.

MFG One if the tax director identified their industry as manufacturing; zero otherwise.

HIGH_PLANNER One if the firm spends greater than 50 percent of their tax resources on planning
as reported in the survey; zero otherwise.

HIGH_INTL One if the firm is above the median of the number of countries in which a
consolidated tax return is filed; zero otherwise.

R&D One if the respondent provides an assessment of 4 or 5 to the question, “Please rate
the importance of R&D to the success of your firm on a scale of 1 to 5, where 1 is not
that important and 5 is very important”; zero otherwise.

UNDERFUNDED_TP One if the respondent indicates that his/her company “would benefit from investing
additional resources in transfer pricing”; zero if the respondent indicates that
his/her company “has invested appropriate resources in transfer pricing activities
for your needs,” or “could invest less in transfer pricing activities.”

PUBLIC One if the respondent indicated that his/her company is publicly traded; zero otherwise.

ENFORCEMENT Average of enforcement ratings of tax authority ratings for each country, divided by
the number of countries with which the tax director identified (s)he had experience.
The ratings of each tax authority is based on the response by respondents with
experience
with that country’s tax authority to the question “How would you rate the enforcement of
transfer pricing rules in each of the following countries (1 indicates low level of
enforcement and 5 is a high level of enforcement)”.

Our dependent measure is CASH_TAX_GOAL. To make the analysis appropriate for a probit model, we

must use a reduced sample of 43 firms that either selected COMPLIANCE_GOAL or CASH_TAX_GOAL, dropping

firms that selected neither or both goals. The reference category for the dependent measure consists of

COMPLIANCE_GOAL firms.

We include a number of variables representing nontax costs that could affect the firm’s choice of a transfer

pricing strategy. First, we include AC_SCRUTINY as a measure of internal governance. We expect that when
managers face greater oversight over their tax and transfer pricing positions, they perceive management wants them

to pursue a compliance goal, leading to a negative coefficient on AC_SCRUTINY.

Second, beyond taxes, transfer prices also provide information on internal costs and to compensate business

unit managers on operating performance. Therefore, managerial accounting incentives are important nontax costs

that could reduce the tax savings related to transfer prices. Currently, the United States allows firms to “decouple,”

or use two different transfer prices for the same product—one for tax and one for cost accounting. However, not all

firms decouple, and in some cases, the preferred transfer pricing method is not accepted by the tax authorities. 17

Because decoupling can eliminate incremental nontax costs related to managerial incentives in tax-motivated

transfer pricing, we predict that decoupling will increase the likelihood of firms adopting a CASH_TAX_GOAL

strategy, yielding a positive coefficient on DECOUPLING_TP.

Third, taking advantage of transfer pricing opportunities to lower cash taxes may be limited by the

logistical costs of arranging a company’s operations (Williams 2015). For example, maximizing cash tax savings

from transfer pricing for a manufacturing firm requires the firm to move physical operations or make new supplier

arrangements. Alternatively, a firm that has intensive R&D may achieve cash tax savings that require fewer

logistical changes, such as by setting up a cost contribution arrangement with a subsidiary in a low tax jurisdiction.

Thus, we expect firms that face higher logistical costs, MFG, to have a lower likelihood (negative coefficient) of

adopting a CASH_TAX_GOAL strategy. Likewise, we expect firms with lower logistical costs, R&D, to have a

higher likelihood (positive coefficient) of selecting CASH_TAX_GOAL. Fourth, public firms may face higher

financial reporting costs than private firms in the event the transfer price is disallowed and triggers repatriation tax

(Blouin et al. 2012a). These firms will be less inclined to pursue a CASH_TAX_GOAL strategy, yielding a negative

coefficient on PUBLIC.

Finally, we include tax-related variables that likely explain transfer pricing practices. We expect firms that

have greater international operations (HIGH_INTL) will more likely adopt a CASH_TAX_GOAL strategy due to

greater flexibility in foreign location decisions. Firms that face greater tax authority enforcement (ENFORCEMENT)

17
One major risk of decoupling identified by firms is that the tax authorities will view both prices as acceptable estimates, and
then choose the one that maximizes their tax revenue.
may experience higher tax-related costs through audit scrutiny, penalties, and interest, and thus be less likely to

adopt a CASH_TAX_GOAL strategy. To capture resource availability (allocation), we include

UNDERFUNDED_TP (HIGH_ PLANNER) and predict a negative (positive) link to CASH_TAX_GOAL.

Note that we do not include the nontax cost variables of AC_SCRUTINY, MFG, or DECOUPLED_TP in

our regression tests later because exploratory tests find that none are related to GAAP ETR, and our sample sizes are

small (with few degrees of freedom). Yet, as we describe below, these variables are significant in explaining the

choice of strategy. Thus, if a two-stage regression were feasible, these three measures could serve as viable

exclusionary variables. Future research with a more powerful setting can explore these relations more deeply.

Results of determinants model

Descriptive statistics

We begin our analysis of firms’ selection of transfer pricing goals by briefly describing some survey data for the 43

firms used in equation (1). As reported in Table 2, we find that 24 of the 43 firms (56 percent) report lack of disputes

as a key goal of the transfer pricing practice, while 19 (44 percent) report cash tax paid as a goal. This finding

mirrors the responses above using the larger sample of respondents that a greater share of firms focuses on lack of

disputes than cash taxes paid. In terms of the explanatory variables, firms focusing on cash taxes paid report

significantly more ability to decouple transfer prices (DECOUPLED_TP) (p<0.05) and are less likely to report that

their transfer pricing practice is underfunded (UNDERFUNDED_TP) (p<0.10). The other measures are not

significantly different in the univariate tests.

Regression results

We estimate equation (1) using probit regression with robust standard errors clustered on 2-digit SIC. We report the

results in Table 3. Regarding nontax costs, the coefficient on AC_SCRUTINY is significantly negative (p<0.01),

implying that firms whose audit committees scrutinize transfer pricing are less likely to adopt a tax minimization

strategy. The coefficient on DECOUPLED_TP is positive and significant (p<0.01), consistent with a tax

minimization strategy more likely being adopted by firms that reduce managerial accounting costs by using two

transfer prices. The coefficient on MFG (R&D) is significantly negative (positive), suggesting that logistical costs

play a role in adopting a tax minimization strategy. The coefficient on PUBLIC is significantly negative (p<0.01),

consistent with increased financial reporting costs discouraging adoption of a tax minimization strategy.
 Regarding tax costs, the coefficient on ENFORCEMENT is negative as predicted, but not significant. The

lack of significance could be a result of the small sample size or noise in the proxy because it is based on countries

where the tax director has experience.18 The coefficient on HIGH_INTL is significantly positive (p=0.053),

suggesting that firms with greater international operations are more likely to adopt a tax minimization strategy.

Lastly, UNDERFUNDED_TP (HIGH_PLANNER) is significantly negative (positive), suggesting that firms that face

budgetary constraints (engage in extensive tax planning) related to transfer pricing are less (more) likely to adopt a

tax minimization strategy. Overall, our results are consistent with firms considering tax and nontax costs in

determining their tax strategies.

5. Consequences of firms’ transfer pricing strategies

Empirical model

In this section, we formally test our hypothesis as to whether firms’ effective tax rates are related to their tax

departments’ goals of cash taxes paid or avoiding disputes with tax authorities. We estimate Eq. (2) using ordinary

least squares regression:

GAAP ETR = β0 + β1 CASH_TAX_GOAL + β2 COMPLIANCE_GOAL + β3 TAX_HAVEN

+ β4 HIGH_INTL + β5 TAX_BUDGET + β6 HIGH_PLANNER + β7 lnASSETS
+ β8 R&D + β9 TP_EXPERIENCE + β10 NOL + β11 UNDERFUNDED_TP
+ β12 PUBLIC + β13 SALES_TO_ASSETS + β14 ENFORCEMENT + 2)

We measure the variables not defined above as follows (also defined in the Appendix):

GAAP ETR The respondent’s response to the question “What was your effective tax rate?”

TAX_HAVEN One if the respondent indicates experience with a tax haven jurisdiction, as defined by
Gravelle (2009), among the 35 country choices when asked “Outside of your home
jurisdiction, with which countries or territories have you had direct transfer pricing
experience?”; zero otherwise.

TAX_BUDGET Tax department’s tax budget as reported in the survey, scaled by ASSETS.

lnASSETS Natural logarithm of the midpoint of the range of total assets as reported in Table 1 in
which the respondent indicates their firm belongs. The value of ASSETS is coded as the
midpoint in the range indicated by the respondent.

TP_EXPERIENCE One if the tax director identifies that (s)he had greater than 10 years of experience in
transfer pricing issues; zero otherwise.

18
To the extent that the list of countries is not representative of the company’s operations, this measure may be of limited use. In
addition, all locations identified are provided the same weight, which is not likely to be representative of the importance of each
regime to the firm’s operations. Estimating the model with an alternative measure of country-level tax authority enforcement
based on Mescall and Klassen (2015) produces a directionally similar coefficient of −0.398 with marginal improvement on
statistical significance at p=0.11.
NOL One if the corporation reports a U.S. net operating loss carry-forward; zero otherwise.

SALES_TO_ASSETS Ratio of Sales, or the midpoint of the range of total revenue as reported in Table 1
in which the respondent indicates their firm belongs, to Assets.

Our hypothesis predicts that firms with a goal of cash taxes paid for their transfer prices will report lower

GAAP ETRs than firms that have a goal of lack of disputes with tax authorities. Therefore, we expect a negative

(positive) coefficient on CASH_TAX_GOAL (COMPLIANCE_GOAL). We estimate this model on the 64 firms have

all necessary data to estimate these variables, as described above at the end of section 3.

With respect to our remaining variables, we expect that as a tax department develops expertise in tax

havens and, more generally, in foreign jurisdictions, it has greater opportunities for tax minimization, yielding

negative coefficients on TAX_HAVEN and HIGH_INTL, respectively.19 We also expect firms with a higher budget

to generate greater tax savings, resulting in a negative coefficient on TAX_BUDGET. We predict that firms spending

more resources on tax planning will have a lower GAAP ETR, yielding a negative coefficient on HIGH_PLANNER

(Cook, Huston, and Omer 2009). We also predict that larger firms will have lower relative costs of avoiding tax,

generating a negative coefficient on lnASSETS.

Firms with more intellectual property and tax directors with transfer pricing expertise likely have greater

tax minimization opportunities, so we expect R&D and TP_EXPERIENCE will be negative. We expect that firms

with underfunded transfer pricing practices will be less able to seize transfer pricing opportunities to minimize tax,

so we predict a positive coefficient on UNDERFUNDED_TP. Publicly traded firms likely encounter greater capital

market pressures to show higher net income than private firms. To the extent that reductions in the GAAP ETR aids

in this objective, we expect a negative coefficient on PUBLIC. We also expect firms with stronger operational

performance or growth to report higher taxes, yielding a positive coefficient on SALES_TO_ASSETS. Finally, we

expect that firms subject to stronger tax enforcement will avoid less tax (Hoopes, Mescall, and Pittman 2012),

resulting in a positive coefficient on ENFORCEMENT.

19
We check to see if there is any difference in using the original OECD 1998 tax haven list that includes the Bahamas, Barbados,
and Cayman Islands, instead of Gravelle (2009) that includes other countries (e.g., Netherlands, Ireland, Singapore). All results
hold using the alternative OECD 1998 variable definition for TAX_HAVEN.
Results of consequences model using survey data

Descriptive statistics

We begin our analysis of the link between the tax department’s transfer pricing goals and effective tax rates by

describing the survey data underlying the variables in equation (2). Panel A of Table 4 reports that our sample firms

have a mean (median) GAAP effective tax rate (GAAP ETR) of 26.1 (29) percent in 2010, substantially below the

top U.S. statutory tax rate of 35 percent.

After splitting the sample on the mutually exclusive COMPLIANCE_GOAL (n=23) and

CASH_TAX_GOAL (n=17) variables, we test whether firm attributes differ between these firms. Providing initial

support for our hypothesis, we find that GAAP ETR is higher for compliance goal than cash tax-goal firms (p<0.05,

two-tailed). No other variables are significantly different across the two subsamples. The lack of significance across

the other variables suggests that the two groups are similar along dimensions other than their corporate transfer

pricing goals.20

Regarding the remaining variables, we find that almost 84 percent of our respondent firms have experience

with tax havens (TAX_HAVEN). Although this value seems high (e.g., Dyreng and Lindsay [2009] report 60 percent

of their firm-years have a material subsidiary in a tax haven country, and Law and Mills [2015] report 71 percent), 21

our respondent firms are all multinationals and typically very large. In fact, approximately half our sample firms file

country-level consolidated tax returns in over 10 countries. See Figure 1 for a distribution of countries in which our

tax director respondents have experience. We group the disclosed countries into tax haven and nontax haven

jurisdictions as listed in Gravelle (2009).

Our sample reports a mean (median) tax budget of 0.14 (0.10) percent of total assets (TAX_BUDGET).

Figure 2 provides evidence of the importance of transfer pricing as it is a significant and growing portion of the tax

budgets of multinational corporations. Our respondents report that they spent a significantly higher proportion of

20
The finding that the two samples are not significantly different along all these dimensions largely alleviates concerns that
selection bias may influence the results using equation (2). Thus, we do not anticipate that our results are sensitive to propensity
score matching or a two-stage regression that would incorporate our equation (1).
21
However, the data used in the two studies above are self-reported on 10-K Exhibit 21. Donohoe et al. (2012) describe the
failure of some companies to report their tax haven subsidiaries in their Exhibit 21.
their tax budgets on transfer pricing in 2010 (panel A) than they did in 2000 (panel B). For example, Figure 2 shows

that in 2000 respondents spent relatively little on transfer pricing with 78.8 percent of respondents reporting they

spent less than 10 percent of their tax budgets on transfer pricing, while in 2010 the proportion of minimal spenders

shrunk to only 23.2 percent of respondents. In contrast, the number of respondents spending 10 to 50 percent of their

tax budget on transfer pricing grew from 18.2 percent in 2000 to 68.6 percent in 2010. Figure 3 supports the view

that transfer pricing is commanding more firm resources. More than two-thirds of our respondents, or 70.8 percent,

report that transfer pricing is more burdensome than other areas of tax (score of 4 or 5), while only 2.6 percent of

respondents think that transfer pricing is less burdensome than other areas of tax (score of 1 or 2).

Figure 4 provides evidence of diversity in practice of how firms allocate their resources for transfer pricing

between compliance and planning. Transfer pricing compliance consumes the majority of the transfer pricing

resources for most of our firms (69 percent of our respondents). However, 31 percent of our firms spend more than

50 percent of their transfer pricing resources on tax planning (HIGH_PLANNER). Table 4, panel B shows no

significant difference in HIGH_PLANNER between COMPLIANCE_GOAL and CASH_TAX_GOAL firms.

Untabulated analysis also shows that the decision to engage in high levels of planning does not differ between firms

above or below median ASSETS, or PUBLIC or non-PUBLIC firms. Collectively, these results suggest that although

the goals of transfer pricing may differ across firms, tax planning is not emphasized by only large public firms.

Of the firms in our sample, the mean (median) range of total raw assets (ASSETS) reported by our

respondent firms is $39 ($3) billion. Approximately 39 percent of our firms report that research and development

activities (R&D) are an important aspect of their firm’s business operations. More than half of our respondents, or

56 percent, are tax directors with over 10 years of experience (TP_EXPERIENCE). Also, over half of our

respondents, or 53 percent, recommend additional internal corporate funding for transfer pricing

(UNDERFUNDED_TP). The proportion of our sample reporting a net operating loss carry-forward (NOL) is 44

percent, a finding that is not surprising given the high proportion of non-U.S. NOLs reported by multinationals

documented in Mills, Newberry, and Novack (2003). We find that 81 percent are publicly traded (PUBLIC). On

average, using the midpoint of the reported ranges, the firms’ sales are, on average, slightly higher than its assets

(SALES_TO_ASSETS). Finally, perceived tax enforcement around the world in which the firm operates
(ENFORCEMENT) appears to be of average strength, at 2.8 (on a 5-point scale). In all, we find that our respondents

are typically large public companies with significant tax haven and international exposure, and their tax directors

are very experienced.

Panel B of Table 4 reports that our goal measures are negatively correlated by construction. We also find a

consistently negative (positive) relation between GAAP ETR and CASH_TAX_GOAL (COMPLIANCE_GOAL); both

of these correlations are consistent with our hypothesis. GAAP ETR is also negatively correlated with TAX_HAVEN,

suggesting that firms with greater experience in using tax havens achieve a lower effective tax rate. GAAP ETR is

negatively correlated with HIGH_INTL, lnASSETS, R&D, TP_EXPERIENCE, and PUBLIC, while it is positively

related to SALES_TO_ASSETS. These significant correlations, even with such a small sample of 64 firms, confirm

the strong associations expected for these proxies.

Regression results

Column (1) of Table 5 reports the main results of estimating equation (2) using OLS regression with robust standard

errors clustered by 2-digit SIC industry code and two-tailed p-values. Consistent with our hypothesis,

CASH_TAX_GOAL has a significantly negative coefficient of -0.028 (p=0.055). Thus, firms that evaluate transfer

pricing success based on cash taxes paid have a GAAP ETR that is 2.8 percentage points lower, on average, than

firms that identify both or neither cash taxes paid and lack of disputes with tax authorities as a goal. This estimate

represents almost 19 percent of the sample interquartile range for GAAP ETR. In addition, COMPLIANCE_GOAL

has a significantly positive coefficient of 0.037 (p=0.074), suggesting that firms that evaluate transfer pricing

success based on tax compliance have a GAAP ETR that is 3.7 percentage points higher than firms that identify both

or neither goal. This estimate represents about 25 percent of the GAAP ETR interquartile range. Both findings

support our main hypothesis that firms with a goal of lack of disputes with tax authorities report higher ETRs than

cash taxes paid-goal firms.

Our other explanatory variables are largely consistent with the univariate results. The negative coefficient

of −0.047 on TAX_HAVEN (p=0.097) implies that firms with tax haven experience report GAAP ETRs of 4.7

percent lower than firms without tax haven experience. This effect seems to subsume any potential significance on
HIGH_INTL. The variables TAX_BUDGET and TP_EXPERIENCE have significantly negative coefficients (p<0.01

and p=0.09, respectively), suggesting that more and higher-quality transfer pricing resources are related to greater

tax avoidance. HIGH_PLANNER is negatively related to tax rates (p=0.021), providing evidence that firms

investing more than half of their transfer pricing resources in tax planning achieve lower ETRs, on average. Also,

firms that desire greater resources for their transfer pricing activities (UNDERFUNDED_TP) report significantly

higher ETRs (p=0.085) than firms that are adequately funding their transfer pricing practice. These results provide

some of the first direct evidence that greater tax budgets, transfer pricing experience, tax haven use, and tax

planning explain how and when transfer pricing is linked to tax avoidance.

The variables lnASSETS and R&D have significantly negative coefficients (p=0.06 and p<0.01,

respectively), suggesting that lower GAAP ETR is related to both greater size and importance of intellectual

property. On the other hand, the significantly positive coefficient on SALES_TO_ASSETS (p<0.01) indicates that

stronger financial performance is linked to greater ETR in our sample. We do not find reliable evidence that NOL

firms, PUBLIC firms, or firms subject to stricter tax authorities (ENFORCEMENT) have a statistically different

level of ETR than non-NOL firms, private firms, or firms operating in more lax regulatory environments,

respectively, after accounting for other factors.

Collectively, the main regression results from estimating equation (2) provide new and detailed evidence

that the effect of transfer pricing on tax minimization is not uniform across firms, and that differences in transfer

pricing strategies and practices have economically large effects on firms’ tax outcomes as measured by the GAAP

effective tax rate.

Alternative specifications

The tax minimization and compliance strategy proxies in equation (2) reflect the survey responses that firms more

often rely on one metric over the other to measure the efficiency of their transfer pricing. However, 10 of the 64

firms report that they use both goals to assess transfer pricing efficiency. To consider firms that emphasize both

goals, in our first alternative specification we generate two new variables, CASH_TAX_GOAL_ALL and

COMPLIANCE_GOAL_ALL, each of which includes all firms that consider the goal, whether or not it considers the
other goal as well. We replace CASH_TAX_GOAL with CASH_TAX_GOAL_ALL and COMPLIANCE_GOAL with

COMPLIANCE_GOAL_ALL. We also interact the two *_ALL variables. In the presence of the interaction term, the

coefficients on the main effects continue to measure the relation for firms that selected one goal, but not the other.

The baseline group contains firms that selected neither goal. Column (2) of Table 5 reports the results. We find that

the GAAP ETR results are strongest in firms that exclusively select cash taxes as a goal; that is, the coefficient is

−0.036 on the CASH_TAX_GOAL_ALL main effect. In this specification, the exclusivity or combination of

selecting compliance as a goal does not appear to have a differential impact on ETRs; and an untabulated F-test of

the sum of the three goal variables’ coefficients does not reject the null that their sum equals zero.

In our second specification, we remove the 24 firms that either selected both goals or neither goal. We do

so to draw a more direct comparison between the 17 firms reporting cash taxes, but not lack of disputes with tax

authorities, and the 23 firms that select lack of disputes, but not cash taxes, as a goal (i.e., CASH_TAX_GOAL = 0 is

the same as COMPLIANCE_GOAL = 1). Column (3) of Table 5 reports that firms with cash taxes as a goal report

GAAP ETRs that are 6.6 percentage points lower than firms with compliance as a goal (p=0.014). This spread in

ETRs between the firm types is similar in size to the difference in coefficients in column (1) and is economically

significant. We estimate that the mean difference in tax savings translates to about $43 million. 22

6. COMPUSTAT data analysis

Empirical model

Because 40 of our 64 respondents report their company’s identity, we can assess the validity and generalizability of

our survey results on tax outcomes by using publicly available COMPUSTAT data. We can also explore the relation

between the goals of the tax department and GAAP ETR in cross-sectional tests related to the opportunities to

engage in tax planning. Finally, we can explore differences in reported FIN 48 tax reserves across the transfer

pricing goals.

22
This estimate equals 0.066 × average pretax income for our estimation sample of $652 million.
 To perform these tests, we estimate the following pooled cross-sectional model from Hoopes et al. (2012)

for firm i in year t (subscripts suppressed) for the period 2007-2012:23

ETR or UTB = 0 +  1 CASH_TAX_GOAL +  2 COMPLIANCE_GOAL +  3 lnASSETS

+  4 LEVERAGE +  5 TAX_HAVEN +  6 INVENTORY_INTENSITY
+  7 R&D +  8 CAPITAL EXPENDITURES +  9 ROA +  10 NOL
+  11NOL +  12 FOREIGN INCOME +  m INDUSTRY+  n YEAR +  

The variables are defined in the Appendix. The two goal variables are the same as in equations (1) and (2),

and while drawn from our 2010 survey, we assume the same goals apply in all years because transfer pricing

strategies likely remain persistent over time. COMPUSTAT is used to specify the other variables, including one-

and three-year GAAP and cash ETRs (ETR). These tests provide up to 236 firm-year observations for our models.24

In addition to ETR, we use the FIN 48 tax reserve, or ending balance unrecognized tax benefits scaled by assets

(UTB/Assets), as the dependent variable. This test evaluates whether cash tax-goal firms achieve tax savings using

more uncertain transfer pricing arrangement relative to compliance-goal firms.

Results of consequences model using COMPUSTAT data

Descriptive statistics

Table 6 reports the distribution of the variables in the pooled samples, as well as by the two transfer pricing goals.

The results show that the means of the one- and three-year GAAP and cash ETRs are all between 28.6 and 30.2

percent. However, the one- and three-year GAAP ETRs, as well as the three-year cash ETR, are higher for the

compliance-goal firms than for the cash tax goal firms, statistically significant at a 10 percent level using a one-

tailed test. Separately, the FIN 48 tax reserves (UTB/Assets) are significantly higher for the cash tax-goal firms than

the compliance-goal firms (p<0.01), suggesting that the tax savings of cash tax-goal firms include significant

uncertain transfer pricing positions. The other findings from Table 6 are that ROA is higher in compliance-goal

firms than cash-goal firms and the difference is statistically significant at a 5 percent level. All other variables do

not significantly differ between the two goal firm types.

23
We start with 2007 because it was the first reporting year during which FIN 48 was effective.
24
Of the potential 240 firm-year observations for our sample (40 firms for which we have their identity over 6 years), we are
missing data to calculate ETR for one firm in 2007, two in 2011 and one in 2012. Missing these 4 observations results in 236
firm/year observations.
Regression results

We estimate equation (3) using ETR, or one- and three-year GAAP and Cash ETRs, as the dependent variables. In

untabulated results, we find evidence consistent with those reported in Table 5 using the survey data. In particular,

using the one- and three-year GAAP ETR as the dependent variables, the coefficients on CASH_TAX_GOAL are

−0.143 and −0.060, respectively (both p<0.01). The results using one- and three-year cash ETR yield coefficients on

CASH_TAX_ GOAL of −0.058 and −0.090 (p<0.05 and p<0.01), respectively. Thus, the tests using COMPUSTAT

data suggest that ETRs are lower by between 5.8 and 14.3 percentage points for firms with a goal of cash taxes paid

compared to a goal of lack of disputes with tax authorities. These results provide evidence consistent with our

hypothesis and survey estimates, and provide favorable external and internal validity checks that our survey results

are largely reliable and generalizable.

Cross-sectional analyses

To examine the influence of tax planning opportunities on the association between transfer pricing goals and tax

outcomes, we conduct three cross-sectional analyses that identify general areas of opportunities that likely allow for

differential effects of transfer pricing on ETRs. In particular, we examine the role of the two goal variables on ETRs

in light of increasing (1) foreign income; (2) tax haven use; and (3) R&D. We expect that the cash tax-goal firms’

ETRs will be lower after considering these three firm features; that is, cash tax-goal firms with higher international

profitability, tax haven use, and R&D will report lower ETRs than cash tax-goal firms with lower international

exposure, no tax havens, and little to no R&D. We make no prediction on the role of these features on GAAP ETR

for compliance-goal firms because if the firm has already decided on a strategy of compliance, the opportunities for

tax avoidance related to the firm attributes may not be exploited for tax planning more than other firms. Overall, we

expect these three firm attributes should have a negative effect on firms’ ETRs, but tax-minimizing firms will

exploit these opportunities more so than compliance-oriented firms.

The results are consistent with our expectations. After interacting each of our goal variables with the three

firm attributes in separate specifications, where we denote each attribute as CS_VAR, we report in Table 7, columns

(1a), (2a), and (3a) that cash tax-goal firms report even lower GAAP ETRs as tax planning opportunities related to

foreign income, tax haven use, and R&D, compared to compliance-goal firms and cash tax-goal firms that do not
have these opportunities. In column (1a), the main effect of FOREIGN_INCOME is negative, consistent with more

foreign income lowering the GAAP ETR for firms with neither or both transfer pricing goals, possibly due to lower

foreign tax rates outside the United States. The main effect of CASH_TAX_GOAL remains significantly negative,

indicating that firms with cash taxes as a goal have a negative intercept shift. The interaction of the goal and

FOREIGN_INCOME is also negative, suggesting that firms with more foreign income and a goal of reducing cash

taxes are able to achieve lower GAAP ETR. On the other hand, firms with a COMPLIANCE_GOAL have a positive

intercept shift and there is no observable difference as foreign income increases, relative to firms with neither or

both goals.

In order to make a more direct comparison between the cash tax-goal and compliance-goal firms, in Table

7, columns (1b), (2b), and (3b), we drop observations that select both goals or neither goal. The results in column

(1b) provide similar inferences to those in column 1(a): foreign income decreases GAAP ETR for compliance-goal

firms (the main effect on FOREIGN_INCOME is negative), but the relation is more negative with

CASH_TAX_GOAL firms. There is also a significantly negative coefficient on the main effect, CASH_TAX_GOAL.

Broadly similar inferences are found in the cross-sectional tests of TAX_HAVEN. The key differences are

that in the full samples tests in column (2a), many coefficients fail to achieve statistical significance. The coefficient

on the interaction of CASH_TAX_GOAL and TAX_HAVEN is negative, suggesting that firms with this goal achieve

lower GAAP ETR values, on average, when they also have a tax haven subsidiary. However, the results in column

(2b) provide weak evidence that COMPLIANCE_GOAL firms that use tax havens report higher GAAP ETRs (the

main effect on TAX_HAVEN is significantly positive), but CASH_TAX_GOAL firms that do not use tax havens

report a lower ETR, while the combination of tax havens and the CASH_TAX_GOAL is related to an even lower

GAAP ETR.

When considering cross-sectional differences in R&D intensity, the regression in column (3a) reveals that

the main effects of the CASH_TAX_GOAL and COMPLIANCE_GOAL variables have a negative and positive

coefficient, respectively, consistent with the main results. However, the coefficients on the interactions of these

variables with R&D are both negative, with the coefficient on the interaction of R&D and COMPLIANCE_GOAL
being inconsistent with our expectation. When we include only observations in which one or the other goal is

indicated, the interaction of the CASH_TAX_GOAL and R&D has a negative coefficient that is statistically

significant at the 10 percent level (see column (3b)). We conclude that there is only modest evidence that the effect

of R&D on the GAAP ETR varies with the transfer pricing goals.

We highlight that our results on tax havens extend Dyreng and Lindsey (2009) who correlate tax haven use

to lower ETRs, although they cannot test whether tax-motivated transfer pricing is the mechanism. Our survey

allows us to link more directly ETRs and transfer pricing efforts, after incorporating the perceived tax benefits of tax

haven use and other firm attributes. Our findings on both R&D and foreign activities also extend prior research (e.g.,

Klassen and Laplante 2012a) by providing more direct evidence on the role of transfer pricing to minimize taxes in

the presence of these firm attributes.

FIN 48 tax reserve tests

In our final analysis, Table 8 reports results for testing whether cash tax-goal firms report higher reserves for

uncertain tax positions than compliance-goal firms.25 We use the FIN 48 UTB ending balance to proxy for firms’ tax

uncertainties (Lisowsky et al. 2013). We find that the tax reserve (UTB/Assets) is significantly lower for

compliance-goal firms than the cash tax-goal firms. The results suggest that the goal of compliance is accompanied

by claiming fewer uncertain tax positions. Based on the coefficient on CASH_TAX_GOAL of 0.009 in column (3) of

Table 8, the estimates imply that firms with goals of compliance report a UTB liability that is $27.6 million lower,

on average, than firms with a cash tax goal.26 Our tests focusing on FIN 48 help triangulate that not all firms use

transfer pricing strategies to minimize taxes, but those that do appear to use more uncertain, or aggressive, positions.

25
Consistent with the previous estimates of equation (3) using COMPUSTAT data, the UTB sample starts with 240 potential
firm-year observations (40 firms over 6 years). We lose 28 observations due to missing UTB data in COMPUSTAT (3 firms
were missing UTB data in all 6 years, and 5 firms were missing some data during the period). Thus, our UTB results in Table 8
have 212 observations from 37 unique firms.
26
We calculate the difference in UTB liability based on the results of Table 8 which report a 0.009 higher average UTB/total
assets for CASH_TAX_GOAL firms. The total assets implied by the mean logged total assets, 8.031 (reported in Table 6), is
$3.075 billion; thus, on average, CASH_TAX_GOAL firms report approximately $27.6 million greater UTB liability (0.009 ×
$8.031 billion).
7. Conclusion
Using a survey of tax directors at multinational firms, our study provides the first detailed evidence that transfer

pricing strategies and practices are not uniform across multinational firms. First, we find that firms assess the

efficiency of their transfer pricing practices across a variety of metrics, but that lack of disputes with tax authorities,

reflecting a tax compliance strategy (at 49 percent), seems to be more frequent than cash taxes paid, reflecting a tax

minimization strategy (at 41 percent). Second, using our survey data, we find that both tax and nontax costs

determine the choice of transfer pricing strategy, whether tax minimization or tax compliance. In particular, firms’

selection of a cash tax goal is less likely with greater audit committee scrutiny, financial reporting costs, and internal

firm resources, but more likely if the firm decouples its transfer prices from internal cost accounting, has greater

international operations, and engages in extensive tax planning. Logistical costs also play a role in adopting a tax

minimization strategy.

Third, we find that a firm’s criteria for success in transfer pricing significantly impacts the GAAP effective

tax rate. We estimate that multinational firms with a transfer pricing goal of cash taxes paid report GAAP ETRs that

are 6.6 percentage points lower than firms focusing on a lack of dispute with tax authorities. These estimates imply

$43 million more in tax savings for firms with a goal of cash taxes paid than for firms with a goal of lack of

disputes. Larger tax budgets, more experienced tax directors, and a commitment to tax planning in transfer pricing

are linked to lower ETR, suggesting that resources and skill indeed have significant effects on tax outcomes. An

analysis of COMPUSTAT data confirms our survey results using one- and three-year GAAP and cash ETRs. In

cross-sectional tests, we find that firms focusing on cash taxes report even lower ETRs when foreign income, tax

haven use, and R&D activities are greater, consistent with opportunities for tax planning created by these company

features.

Finally, we find that compliance-oriented firms report significantly lower FIN 48 tax reserves than cash

tax-goal firms, suggesting that the former group pays more taxes, but achieves lower uncertainty. Additionally, this

result suggests that firms focused on achieving lower cash taxes through transfer pricing create more risk in the tax

process. However, we are not able to directly address any risk differences in our primary tests.

In all, our study is a first step towards providing direct evidence on the role of firm-specific goals in tax

planning. We extend research in accounting and economics investigating the links between transfer prices and tax
reduction by more directly identifying corporate strategies and practices related to transfer prices and linking

them to effective tax rates, as well as supplementing our insights on the role of foreign income, tax havens, and

R&D in this context.

We stress that while a survey is presently the best method of obtaining data on the internal objectives of tax

departments with regard to transfer pricing choices, these data are self-reported and potentially subject to bias. Due

to our small sample size, we also cannot fully control for self-selection in the choice of goals. However, we

demonstrate that the choice of goal is consistent with the costs and benefits of tax planning within the firm,

suggesting that the choice is a rational response to the firm’s characteristics and environment. We also find evidence

using publicly available data that our results can generalize. Therefore, our study provides new evidence on the role

of transfer pricing strategies and practices in tax minimization.

References

Armstrong, C., J. Blouin, A. Jagolinzer, and D. Larcker. 2015. Corporate governance, incentives, and tax

avoidance. Journal of Accounting and Economics 60 (1): 1–17.

Armstrong, C., J. Blouin, and D. Larcker. 2012. The incentives for tax planning. Journal of Accounting and

Economics 53 (1-2): 391–411.

Baker-Tilly International. 2014. Do you have an efficient transfer pricing strategy? Available online at:

http://www.bakertillyinternational.com/web/insights/do-you-have-an-efficient-transfer-pricing-strategy.aspx,

last accessed August 9, 2015.

Baldenius, T., N. Melumad, and S. Reichelstein. 2004. Integrating managerial and tax objectives in transfer

pricing. The Accounting Review 79 (3): 591–615.

Beck, P.J., and P. Lisowsky. 2014. Tax Uncertainty and Voluntary Real-Time Tax Audits. The Accounting Review

89 (3): 867–901.

Bernard, A. B., J. B. Jensen, and P. K. Schott. 2006. Transfer pricing by US-based multinational firms (No.

w12493). National Bureau of Economic Research.

Beuselinck, C., and M. Deloof. 2014. Earnings Management in Business Groups: Tax Incentives or Expropriation

Concealment? The International Journal of Accounting 49 (1): 27–52.

Bevacqua, A. and J. Klopfer. 2013. Managing complexity in intercompany transfer pricing. World Finance.

Available online at: http://www.worldfinance.com/markets/transfer-pricing/managing-complexity-in-

intercompany-transfer-pricing, last accessed August 9, 2015.

Blouin, J., L. Krull, and L. Robinson. 2012a. Is U.S. multinational dividend repatriation policy influenced by

reporting incentives? The Accounting Review 87 (5): 1463–91.

Blouin, J., L. Robinson, and J. Seidman. 2012b. Conflicting transfer pricing incentives and the role of

coordination. Working paper, University of Pennsylvania.

Blumenthal, M., and J. Slemrod. 1992. The compliance cost of the U.S. individual income tax system: A second

look after tax reform. National Tax Journal 45 (June): 185–202.

Blumenthal, M., and J. Slemrod. 1995. The compliance cost of taxing foreign-source income: Its magnitude,

determinants, and policy implications. International Tax and Public Finance 2 (May): 37–53.

Chen, S., X. Chen, Q. Cheng, and T. Shevlin. 2010. Are family firms more tax aggressive than non-family

firms? Journal of Financial Economics 95 (1): 41–61.

Clausing, K. 2003. Tax-motivated transfer pricing and U.S. intrafirm trade prices. Journal of Public Economics

87 (9-10): 2207–23.

Clausing, K. 2006. International tax avoidance and U.S. international trade.” National Tax Journal 59 (2):

269–87.

Collins, J., D. Kemsley, and M. Lang. 1998. Cross-jurisdictional income shifting and earnings valuation. Journal of

Accounting Research 36 (2): 209–29.

Cook, K. A., R. G. Huston, and T.C. Omer. 2008. Earnings Management through Effective Tax Rates: The Effects

of Tax‐Planning Investment and the Sarbanes‐Oxley Act of 2002. Contemporary Accounting Research 25

(2): 447–71.

De Simone, L. 2015. Does a common set of accounting standards affect tax-motivated income shifting for

multinational firms? Journal of Accounting and Economics: forthcoming.

De Simone, L., K. Klassen, and J. Seidman. 2015. Unprofitable affiliates and income shifting behavior. Working

paper, Stanford Graduate School of Business.

Dhaliwal, D., Gleason, C., and L. Mills. 2004. Last-chance earnings management: Using the tax expense to meet

analysts' forecasts. Contemporary Accounting Research 21 (2): 431–59.

Dharmapala, D. 2014. What do we know about base erosion and profit shifting? A review of the empirical

literature. Fiscal Studies 35 (4): 421–48.

Donohoe, M., G. McGill, and E. Outslay. 2012. Through a glass darkly: What can we learn about a U.S.

multinational corporation's international operations from its financial statement disclosures? National Tax

Journal 65 (4): 961–84.

Dyreng, S. D., and B. P. Lindsey. 2009. Using financial accounting data to examine the effect of foreign operations

located in tax havens and other countries on US multinational firms’ tax rates. Journal of Accounting

Research 47 (5): 1283–316.

Eden, L. 2001. Transfer pricing, intrafirm trade, and the BLS International Price Program. Bureau of Labor

Statistics. Available online at: http://www.bls.gov/ore/pdf/ec010020.pdf, last accessed August 9, 2015.

Elliott, W. B., F. Hodge, and K. Jackson. 2008. The association between nonprofessional investors’ information

choices and their portfolio returns: The importance of investing experience. Contemporary Accounting

Research 25 (2): 473–98.

Financial Accounting Standards Board (FASB). 2006. Financial Interpretation No. 48 (FIN 48). Accounting for

Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109. Norwalk, CT.

Gordon, R., and J. R. Hines, Jr. 2002. International Taxation. In: Handbook of Public Economics vol. 4, ed. A.

Auerbach and M. Feldstein. Amsterdam: North-Holland.

Graham, J., M. Hanlon, and T. Shevlin. 2010. Barriers to mobility: The lockout effect of U.S. taxation of worldwide

corporate profits. National Tax Journal 63: 1111–44.

Graham, J., M. Hanlon, and T. Shevlin. 2011. Real effects of accounting rules: Evidence from multinational firms’

investment location and profit repatriation decisions. Journal of Accounting Research 49 (1): 137–85.

Graham, J., M. Hanlon, T. Shevlin and N. Shroff. 2014. Incentives for tax planning and avoidance: Evidence from

the field. The Accounting Review 89 (3): 991–1023.

Graham, J., and C. Harvey. 2001. The theory and practice of corporate finance: Evidence from the field. Journal of

Financial Economics 60 : 187–243.

Gravelle, J. 2009. Tax havens: International tax avoidance and evasion. National Tax Journal 62 (4): 727–53.

Grubert, H., and J. Mutti. 1991. Taxes, tariffs and transfer pricing in multinational corporate decision making.

Review of Economics and Statistics 73: 285–93.

Hanlon, M., and S. Heitzman. 2010. A review of tax research. Journal of Accounting and Economics 50 : 127– 78.

Harris, D. 1993. The impact of U.S. tax law revision on multinational corporations’ capital location and

income shifting decisions. Journal of Accounting Research (Supplement): 111–40.

Hassett, K., and K. Newmark. 2008. Taxation and business behavior: A review of the recent literature. In:

Fundamental Tax Reform: Issues, Choices and Implications, ed. J. Diamond and G. Zodrow, MIT Press,

Cambridge: 191–214.

Higgins, D., T. Omer, and J. Phillips. 2015. The influence of a firm’s business strategy on its tax

aggressiveness. Contemporary Accounting Research 32 (2): 674–702.

Hines, J. R. 1997. Tax policy and the activities of multinational corporations. In: Fiscal Policy: Lessons from

Economics Research, ed. A. Auerbach. MIT Press, Cambridge: 401–45.

Hines, J. R., and E. Rice. 1994. Fiscal paradise: Foreign tax havens and American business. Quarterly Journal of

Economics 109: 149–81.

Hirshleifer, J. 1956. On the economics of transfer pricing. The Journal of Business 29: 172–84.

Hopland, A., P. Lisowsky, M. Mardan, and D. Schindler. 2015. Income shifting under losses. CESifo Working

paper No. 5130.

Hoopes, J. L., D. Mescall, and J. A. Pittman. 2012. Do IRS audits deter corporate tax avoidance? The Accounting

Review 87 (5): 1603–39.

Huizinga, H., and L. Laeven. 2008. International profit shifting within multinationals: A multi-country

perspective. Journal of Public Economics 92: 1164–82.

Jacob, J. 1996. Taxes and transfer pricing: Income shifting and the volume of intrafirm transfers. Journal of

Accounting Research 34 (2): 301–12.

Klassen, K., M. Lang, and M. Wolfson. 1993. Geographic income shifting by multinational corporations in response

to tax rate changes. Journal of Accounting Research 31 (Suppl): 141–73.

Klassen, K., and S. Laplante. 2012a. The effect of foreign reinvestment and financial reporting incentives on

cross-jurisdictional income shifting. Contemporary Accounting Research 29 (3): 928–55.

Klassen, K., and S. Laplante. 2012b. Are U.S. multinational companies becoming more aggressive income

shifters? Journal of Accounting Research 50 (5): 1245–86.

Law, K., and L. Mills. 2015. Managerial characteristics and corporate taxes. Journal of Accounting Research,

forthcoming.

Lisowsky, P., L. Robinson, and A. Schmidt. 2013. Do publicly disclosed tax reserves tell us about privately

disclosed tax shelter activity? Journal of Accounting Research 51 (3): 583–629.

Mescal, D., and K. Klassen. 2015. How does transfer pricing risk affect premia in cross-border mergers and

acquisitions? Working paper, University of Saskatchewan.

Mills, L., M. Erickson, and E. Maydew. 1998. Investments in tax planning. Journal of the American Taxation

Association 20 (1): 1–20.

Mills, L. F., and K. J. Newberry. 2004. Do foreign multinationals' tax incentives influence their US income

reporting and debt policy? National Tax Journal 57 (1): 89–107.

Mills, L. F., K. J. Newberry, and G. Novack. 2003. How well do COMPUSTAT NOL data identify firms with

U.S. tax return loss carryovers? Journal of the American Taxation Association 25 (2): 1–18.

Mills, L., L. Robinson, and R. Sansing. 2010. FIN 48 and Tax Compliance. The Accounting Review 85 (5):

1721–42.

OECD. 1998. Fostering Entrepreneurship—The OECD Job Strategy. OECD, Paris, p.12.

OECD. 2013. Addressing Base Erosion and Profit Shifting. Available online at:

http://dx.doi.org/10.1787/9789264192744-en, last accessed August 9, 2015.

Oppenheim, A. N. 1992. Questionnaire Design, Interviewing, and Attitude Measurement. New York, NY:

Pinter Publishers.

Ossi, G., and M. Shepherd. 2010. The IRS’s emphasis on transfer pricing. Corporate Taxation 37 (4): 3–6.

Robinson, J., S. Sikes, and C. Weaver. 2010. Performance measurement of corporate tax departments. The

Accounting Review 85(3): 1035–64.

Schoenborn, F. 2014. Operational Transfer Pricing: When tax function meets finance function. International Tax

Review. Available online at: http://www.internationaltaxreview.com/Article/3323231/Operational-TP-When-

tax-function-meets-finance-function.html, last accessed August 9, 2015.

Scholes, M., M. Wolfson, M. Erickson, M. Hanlon, E. Maydew, and T. Shevlin. 2014. Taxes and Business Strategy:

A Planning Approach. Fifth edition. Englewood Cliffs, NJ: Pearson.

Shackelford, D., and T. Shevlin. 2001. Empirical tax research in accounting. Journal of Accounting and Economics

31: 321–87.

Slemrod, J., and M. Blumenthal. 1996. The income tax compliance cost of big business. Public Finance Quarterly

24 (4): 411–38.

Slemrod, J., and N. Sorum. 1984. The compliance cost of the U.S. individual income tax system. National Tax

Journal 37 (March): 461–74.

Slemrod, J., and V. Venkatesch. 2004. The income tax compliance cost of large and midsize businesses. A Report to

the IRS LMSB Division.

Tax Executives Institute. 2005. 2004-2005 corporate tax department survey. Tax Executives Institute Inc.

Towery, E. 2015. The interplay between mandatory disclosure regulation and voluntary disclosure: Evidence from

Schedule UTP. Working paper, University of Georgia.

Wallace, R., and C. Mellor. 1988. Nonresponse bias in mail accounting surveys: A pedagogical note. British

Accounting Review 20: 131–9.

Williams, B. 2015. Income shifting and offshored U.S. jobs. Working paper, University of Texas at Austin.

Appendix

Variable definitions

Variables of interest included in all equations

CASH_TAX_GOAL 1 if the respondent identifies “Cash taxes paid” as their response to “How do companies
assess efficiency of their own transfer pricing practice?” and does not identify “Lack of
disputes with tax authorities” to the same question; 0 otherwise

COMPLIANCE_GOAL 1 if the respondent identifies “Lack of disputes with tax authorities” to the question,
“How do companies assess efficiency of their own transfer pricing practice?” and
does not identify “Cash taxes paid” to the same question; 0 otherwise

Variables used in equation (1) (data source: survey)

AC_SCRUTINY 1 if the tax director indicated that “Transfer Pricing” or “Tax Risk” in their response to
the question “What is the most important tax issue to your audit committee”; 0 otherwise

DECOUPLED_TP 1 if the tax director indicated “Yes” to the question “To facilitate the many influences on
determining a transfer price, do companies calculate different transfer prices for
different purposes within the company (i.e., calculate one price for tax purposes and
another for
assessing subsidiary performance etc.)?”; 0 otherwise
MFG 1 if the tax director identified their industry as manufacturing; 0 otherwise

HIGH_PLANNER 1 if the firm spends greater than 50 percent of their tax resources on planning as
reported in the survey; 0 otherwise

HIGH_INTL 1 if the corporation is above the median of the number of countries in which
a consolidated tax return is filed; 0 otherwise

R&D 1 if the respondent provides an assessment of 4 or 5 to the question, “Please rate the
importance of R&D to the success of your firm on a scale of 1 to 5, where 1 is not
that important and 5 is very important”; 0 otherwise

UNDERFUNDED_TP 1 if the respondent indicates that his/her company “would benefit from investing
additional resources in transfer pricing”; 0 if the respondent indicates that his/her
company “has invested appropriate resources in transfer pricing activities for
your needs,” or “could invest less in transfer pricing activities”

PUBLIC 1 if the respondent indicated that his/her company is publicly traded; 0 otherwise

ENFORCEMENT Average of enforcement ratings of tax authority ratings for each country, divided by
the number of countries with which the tax director identified (s)he had experience.
The ratings of each tax authority is based on the response by respondents with
experience
with that country’s tax authority to the question “How would you rate the enforcement of
transfer pricing rules in each of the following countries (1 indicates low level of
enforcement and 5 is a high level of enforcement)”

Variables used in equation (2) (data source: survey)27

GAAP ETR The respondents response to the question “What was your effective tax rate?”

TAX_HAVEN 1 if the respondent indicates (s)he has experience with a tax haven; 0 otherwise

TAX_BUDGET Tax department’s tax budget as reported in the survey, scaled by Assets. Respondents
were asked to indicate the range of the value of their total assets as described in Table
1.
Continuous values were created by using the midpoint of each range

lnASSETS Natural logarithm of the midpoint of the range of total assets as reported in Table 1 in
which the respondent indicates their firm belongs

TP_EXPERIENCE 1 if the tax director identifies that (s)he had greater than 10 years of experience in
transfer pricing issues; 0 otherwise

NOL 1 if the corporation reports a net operating loss carry-forward; 0 otherwise

SALES_TO_ASSETS Ratio of Sales, or the midpoint of the range of total revenue as reported in Table 1
in which the respondent indicates their firm belongs, to Assets

Variables used in equation (3) (data source: COMPUSTAT)

Dependent variables

ETR is one of the following variables:

27
See also variables used in equation (1).
GAAP ETR Total tax expense scaled by pretax income = txtit / piit

3-yr GAAP ETR The sum of three years cash taxes paid, scaled by the sum of three years of pretax net
income = /

CASH ETR Cash taxes paid scaled by pretax income = txpdit /(piit)

3-yr CASH ETR The sum of three years cash taxes paid, scaled by the sum of three years of pretax net
income = /

UTB Ending balance of the FIN 48 unrecognized tax benefit liability scaled by total assets
= (txtubendit) / (atit)

Independent variables

lnASSETS ln(Total Assets) = ln(atit)

LEVERAGE Total long term debt scaled by lagged assets = dlttit / atit-1

INVENTORY_INTENSITY Total inventory scaled by lagged assets = invtit / atit-1

R&D Research and development expense scaled by lagged assets = xrdit /

saleit CAPITAL_EXPENDITURESit Total capital expenditures scaled by lagged assets = capxit / atit-1

ROAit Pretax income divided by assets = piit / atit

NOLit Indicator variable coded 1 if firm has an tax loss carry forward (tlcf<0), 0 otherwise

ΔNOLit The difference between last year’s NOL carry forward and this year’s NOL
carry forward, scaled by lagged assets = (tlcf it − tlcf it-1) / at it-1

FOREIGN_INCOMEit The amount of foreign income earning by a firm, scaled by lagged assets = pifo it / at it-1
 Figure 1 Number of respondents with transfer pricing experience in each country

Question: Outside of your home jurisdiction, with which countries or territories have you had direct transfer pricing
experience?

Bahamas British Virgin Islands Netherlands (Dutch) Antilles

U.S. Virgin Islands
Barbados Cayman Islands
Austria Bermuda Finland New Zeland
frica Malaysia Sweden Argentina Denmark Belgium Ireland Hong Kong
Spain Switzerland Singapore
Italy India Brazil Japan Australia France
Netherlands
Mexico China Germany United States
United Kingdom
Canada

0 20 40 60 80 100 120 140

Figure 2 Resources consumed by transfer pricing over time

Panel A: Percentage of tax resources consumed by transfer pricing in the current year

Question: What percentage of your company's tax resources are consumed by transfer pricing activity?

6.9% 1.0%

23.5%

17.6% < 10%(23.5%)

10% - 30% (51.0%)
30% - 50% (17.6%)
50% - 70%(6.9%)
70% - 90%(1.0%)
> 90%(0.0%)

51.0%

Panel B: Percentage of tax resources consumed by transfer pricing 10 years ago

Question: Ten years ago (in 2000), what percentage of your company's tax resources would have been
consumed by transfer pricing activity?

1.0% 3.0%

17.2%
< 10%(78.8%)
10% - 30% (17.2%)
30% - 50%(1.0%)
50% - 70%(3.0%)
70% - 90%(0.0%)
> 90%(0.0%)

78.8%
 Figure 3 Burden of transfer pricing relative to other tax issues

Question: In your opinion, in terms of time and financial resources required for various tax areas, how
would you rate transfer pricing?

60%

50% 48.4%

40%

30% 26.6%
22.4%
20%

10%
1.6% 1.0%
0%
1 2 3 4 5
Transfer pricing is one of the least
Transfer
burdensome
pricing isareas
no more
of taxor less burdensome
Transfer
thanpricing
otherisareas
one of the
tax most burdensome areas of tax
 Figure 4 Transfer pricing compliance vs. transfer pricing planning

Question: Of tax resources spent on transfer pricing, what was the percentage spent on
compliance and planning in the last 12 months?

30%
Last 12 Months
24.3% 24.3%
25%

20%
16.9%

15%
13.2%

10%
6.9%
5.8%
5% 3.7% 3.2%
1.6%

0%
90% 80% 70% 60%50%40% 30% 20% 10%
compliance compliance compliance compliance compliance compliance compliance compliance compliance
10% planning 20% planning 30% planning 40% planning 50% planning 60% planning 70% planning 80% planning 90% planning
TABLE 1
Distribution of survey respondents and comparison to COMPUSTAT multinationals, COMPUSTAT
global, and TEI membership populations

COMPUSTAT COMPUSTAT TEI

Total assets Multinationals Global Membership Survey respondents
<$10 million 3% 2% 1% 1%
$10–$500 million 40% 35% 24% 22%
$500 million–$1 billion 12% 11% 17% 15%
$1–$5 billion 25% 27% 32% 29%
$5–$50 billion 16% 20% 21% 26%
$50–$500 billion 3% 4% 4% 5%
>$500 billion 1% 1% 1% 2%
100% 100% 100% 100%

COMPUSTAT COMPUSTAT TEI Survey

Total revenues Multinationals Global Membership respondents
< $500 million 47% 38% 24% 25%
$500 million–$1 billion 12% 13% 17% 10%
$1–$5 billion 26% 28% 37% 34%
$5–$10 billion 6% 8% 10% 10%
$10–$50 billion 7% 10% 11% 17%
>$50 billion 2% 3% 2% 4%
100% 100% 100% 100%

COMPUSTAT COMPUSTAT TEI Survey

Tax budgets Multinationals Global Membership Respondents
< $250,000 N/A N/A 15% 10%
$250,000–$500,000 N/A N/A 21% 18%
$500,000–$1 million N/A N/A 26% 16%
$1–$5 million N/A N/A 32% 40%
>$5 million N/A N/A 5% 16%
100% 100%

(continued on next page)

This article is protected by copyright. All rights reserved

TABLE 1 (continued)

COMPUSTAT COMPUSTAT TEI Survey

Industry Multinational Global Membership respondents
Mining and Resources 6% 7% 6% 2%
Utilities 5% 0% 4% 0%
Construction 0% 1% 1% 1%
Manufacturing 45% 58% 36% 49%
Wholesale and Retail 4% 6% 11% 8%
Transportation 1% 1% 3% 2%
Information and Telecomm 13% 11% 5% 8%
Financial and Insurance 4% 5% 10% 6%
Real Estate 1% 2% 2% 1%
Professional Svcs & Education 4% 6% 6% 6%
Health 10% 1% 6% 2%
Media and Entertainment 2% 0% 3% 1%
Food and Accommodation 5% 1% 7% 3%
Other 0% 1% 0% 7%
None of the above 0% 0% 0% 4%
100% 100% 100% 100%

The COMPUSTAT multinational sample data are drawn from the population of COMPUSTAT firms that
had non-missing pretax foreign income (PIFO) in 2010; the COMPUSTAT global sample data are drawn
from the COMPUSTAT multinational population for which foreign pretax income (PIFO) was greater
than 10 percent of total pretax income (PI); the TEI Membership data are drawn from the Tax Executives
Institute’s (TEI) mandatory survey of its membership in 2005; the Survey respondents data are drawn
from this study's tax survey conducted in 2010. The Tax budgets information is not available for
COMPUSTAT firms; it measures the budget of the firm's tax department.
TABLE 2
Descriptive statistics for probit model using survey data (2010)
COMPLIANCE_
GOAL sample CASH_TAX_GOAL
Probit regression sample (n=24) sample (n=19) Mean
Variable n Mean P25 P50 P75 Std Dev Mean Mean Difference
CASH_TAX_GOAL 43 0.442 0.000 0.000 1.000 0.502 0.000 1.000 n/a
AC_SCRUTINY 43 0.326 0.000 0.000 1.000 0.474 0.333 0.316
DECOUPLED_TP 43 0.163 0.000 0.000 0.000 0.374 0.042 0.316 **
MFG 43 0.442 0.000 0.000 1.000 0.502 0.500 0.368
HIGH_INTL 43 0.419 0.000 0.000 1.000 0.499 0.375 0.474
R&D 43 0.581 0.000 1.000 1.000 0.499 0.500 0.684
UNDERFUNDED_TP 43 0.535 0.000 1.000 1.000 0.505 0.667 0.368 *
PUBLIC 43 0.767 1.000 1.000 1.000 0.427 0.833 0.684
ENFORCEMENT 43 2.500 2.645 2.792 2.983 0.942 2.467 2.543

*, **, and *** denote significance using a t-test at the p < 0.10, 0.05, and 0.01 levels (all two-tailed), respectively. See Appendix for full variable definitions. The data
are drawn from this study's tax survey conducted in 2010.

This article is protected by copyright. All rights reserved

 TABLE 3
Probit regression results using survey data (2010) on selecting a cash
tax goal versus a compliance goal

Dependent variable: CASH_TAX_GOAL

Coefficient
Variable Pred. Sign (z-stat)
AC_SCRUTINY − −1.084 ***
(−3.03)
DECOUPLED_TP + 2.407 ***
(2.94)
MFG − −0.547 **
(−2.46)
HIGH_INTL 0.519 *
(1.93)
R&D + 0.857 **
(2.40)
UNDERFUNDED_TP −0.766 **
(−2.24)
PUBLIC − −0.755 ***
(−2.62)
ENFORCEMENT − −0.067
(−0.53)
Constant 0.532
(1.62)
Number of observations 43
2
Adjusted R 29.3%

*, **, and *** denote significance at p < 0.10, 0.05, and 0.01 levels (all
two-tailed), respectively. See Appendix for full variable definitions. The
table reports results on a reduced sample of firms that either selected
CASH_TAX_GOAL or COMPLIANCE_GOAL, with firms that selected
neither or both goals being dropped; thus, the reference category
consists of COMPLIANCE_GOAL firms. The model uses robust
standard errors clustered by two-digit SIC industry code.

This article is protected by copyright. All rights reserved

TABLE 4
Descriptive statistics for regression model using survey data (2010)
Panel A: Distribution and mean analysis COMPLIANCE_
GOAL sample CASH_TAX_GOAL
OLS Regression Sample (n=64) (n=23) sample (n=17) Mean

Variable Mean P25 P50 P75 Std Dev Mean Mean Difference
GAAP ETR 0.261 0.194 0.290 0.343 0.112 0.301 0.211 **
CASH_TAX_GOAL 0.266 0.000 0.000 1.000 0.445 0.000 1.000 n/a
COMPLIANCE_GOAL 0.359 0.000 0.000 1.000 0.484 1.000 0.000 n/a
TAX_HAVEN 0.838 1.000 1.000 1.000 0.387 0.826 0.764
HIGH_INTL 0.469 0.000 0.000 1.000 0.503 0.348 0.588
TAX_BUDGET 0.0014 0.000 0.001 0.002 0.0023 0.001 0.002
HIGH_PLANNER 0.313 0.000 0.000 1.000 0.467 0.304 0.294
lnASSETS 8.235 6.620 8.006 9.616 2.125 7.990 8.410
R&D 0.391 0.000 0.000 1.000 0.492 0.257 0.353
TP_EXPERIENCE 0.563 0.000 1.000 1.000 0.500 0.522 0.588
NOL 0.438 0.000 0.000 1.000 0.500 0.391 0.471
UNDERFUNDED_TP 0.531 0.000 1.000 1.000 0.503 0.565 0.471
PUBLIC 0.813 1.000 1.000 1.000 0.393 0.826 0.706
SALES_TO_ASSETS 1.139 0.429 1.000 1.000 1.027 1.285 0.993
ENFORCEMENT 2.838 2.649 2.849 3.037 0.292 2.919 2.903

(continued on next page)

This article is protected by copyright. All rights reserved

TABLE 4 (continued)

Panel B: Pearson correlation coefficients

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.

1. GAAP ETR
2. CASH_TAX_GOAL -0.27**
3. COMPLIANCE_
0.27** -0.45***
GOAL
4. TAX_HAVEN -0.28* -0.08 0.08
5. HIGH_INTL -0.24* 0.14 -0.18 0.33**
6. TAX_BUDGET -0.19 0.17 -0.05 -0.01 0.02
7. HIGH_PLANNER -0.11 -0.02 -0.01 0.05 -0.03 -0.02
8. lnASSETS -0.25** 0.05 -0.09 0.27* 0.24* -0.49*** 0.01
9. R&D -0.27** -0.05 0.07 0.15 0.08 -0.10 0.08 -0.09
10. TP_EXPERIENCE -0.27** 0.03 -0.06 0.30* 0.13 -0.06 -0.02 0.25** -0.07
11. NOL 0.01 0.04 -0.07 0.05 0.06 0.02 -0.19 0.03 0.00 0.08
12. UNDERFUNDED_
TP 0.13 -0.07 0.05 0.28* 0.00 -0.15 0.16 0.05 0.17 0.06 0.01
13. PUBLIC -0.23* -0.16 0.03 0.48*** 0.13 0.06 -0.02 0.16 0.06 0.06 0.10 -0.13
14. SALES_TO_ASSETS 0.39*** -0.09 0.11 -0.14 -0.04 0.27** 0.11 -0.48*** -0.18 -0.09 -0.01 -0.10 -0.15
15. ENFORCEMENT -0.05 0.13 0.21* -0.11 0.01 0.06 -0.13 -0.13 0.10 -0.04 0.07 -0.02 0.01 -0.12

*, **, and *** denote significance using a t-test at the p < 0.10, 0.05, and 0.01 levels (all two-tailed), respectively. See Appendix for full variable definitions. The
data are drawn from this study's tax survey conducted in 2010. Note that in panel A, 23 of the 64 firms selected compliance without selecting cash taxes as a goal
of their transfer pricing strategy; 17 of the 64 firms selected cash taxes without selecting compliance as a goal of their transfer pricing strategy; and the remaining
24 of the 64 firms selected either both goals or neither goal. Of the last group of 24 firms, 10 selected both goals and 14 selected neither goal.
 TABLE 5
Multivariate regression results using survey data (2010) of the association between GAAP effective tax rates
and transfer pricing strategies and practices

Dependent variable: GAAP ETR (1) (2) (3)

Coefficient Coefficient Coefficient
Variable Pred. Sign (t-stat) (t-stat) (t-
stat)
CASH_TAX_GOAL − −0.028 * −0.066 **
(−2.12) (−2.63)
COMPLIANCE_GOAL + 0.037 *
(1.96)
CASH_TAX_GOAL_ALL − −0.036 *
(−1.94)
COMPLIANCE_GOAL_ALL + 0.029
(1.28)
CASH_TAX_GOAL_ALL ? −0.012
× COMPLIANCE_GOAL_ALL (−0.51)
TAX_HAVEN − −0.047 * −0.050 * −0.045
(−1.80) (−1.84) (−1.71)
HIGH_INTL − −0.005 −0.006 −0.022
(−0.17) (−0.18) (−0.49)
TAX_BUDGET −16.919 *** −16.947 *** −13.262 ***
(−3.78) (−3.60) (−4.21)
HIGH_PLANNER −0.046 ** −0.041 * −0.054 **
(−2.66) (−2.07) (−2.49)
lnASSETS −0.010 * −0.010 * −0.008
(−2.11) (−1.91) (−1.41)
R&D − −0.064 *** −0.064 *** −0.049 ***
(−4.11) (−3.80) (−3.94)
TP_EXPERIENCE −0.042 * −0.041 * −0.063 **
(−1.86) (−1.83) (−3.04)
NOL 0.012 0.014 0.036 *
(0.59) (0.68) (1.91)
UNDERFUNDED_TP 0.049 * 0.048 * 0.062 ***
(1.87) (1.85) (4.40)
PUBLIC −0.014 −0.014 −0.015
(−0.48) (−0.48) (−0.55)
SALES_TO_ASSETS 0.034 *** 0.035 *** 0.027 **
(3.67) (3.56) (3.45)
ENFORCEMENT −0.026 −0.027 −0.079 *
(−0.82) (−0.89) (-2.25)
Constant 0.485 *** 0.496 *** 0.657 ***
(4.55) (4.65) (6.60)
Number of observations 64 64 40
2
Adjusted R 54.6% 54.8% 69.5%

(continued on next page)

This article is protected by copyright. All rights reserved

TABLE 5 (continued)
*, **, and *** denote significance at p < 0.10, 0.05, and 0.01 levels (all two-tailed), respectively. See
Appendix for full variable definitions. The data are drawn from this study's tax survey conducted in 2010.
Note that 23 of the 64 firms selected compliance without selecting cash taxes as a goal of their transfer
pricing strategy (which is the basis for COMPLIANCE_GOAL); 17 of the 64 firms selected cash taxes
without selecting compliance as a goal of their transfer pricing strategy (which is the basis for
CASH_TAX_GOAL); and the remaining 24 of the 64 firms selected either both goals or neither goal. Of
the last group of 24 firms, 10 selected both goals and 14 selected neither goal. Thus, the reference
category in column (1) consists of firms that selected both goals or neither goal. The variables
COMPLIANCE_GOAL_ALL and CASH_TAX_GOAL_ALL in column (2) include the
COMPLIANCE_GOAL and CASH_TAX_GOAL firms, respectively, plus the firms that selected both
goals, which is represented by the interaction term; thus, the reference category in column (2) consists of
firms that selected neither goal. Column (3) reports results on a reduced sample of firms that either
selected COMPLIANCE_GOAL or CASH_TAX_GOAL, with firms that selected neither or both goals
being dropped; thus, the reference category in column (3) consists of COMPLIANCE_GOAL firms. All
models use robust standard errors clustered by two-digit SIC industry code.
TABLE 6
Summary statistics for regression model using multi-year COMPUSTAT data (2007-2012)

COMPLIANCE_ CASH_TAX_GOAL
COMPUSTAT regression sample GOAL sample sample Mean
Variable n Mean P25 P50 P75 Std Dev n Mean n Mean Difference
Dependent variables
GAAP ETR 236 0.296 0.219 0.310 0.353 0.181 88 0.335 60 0.277 *
3-yr GAAP ETR 232 0.302 0.238 0.316 0.359 0.114 88 0.328 60 0.298 *
Cash ETR 187 0.286 0.184 0.261 0.354 0.157 82 0.287 37 0.286
3-yr Cash ETR 157 0.293 0.210 0.287 0.353 0.120 76 0.301 26 0.259 *
UTB/Assets (2007-2012) 212 0.010 0.004 0.007 0.012 0.011 87 0.006 48 0.017 ***
Independent variables
COMPLIANCE_GOAL 236 0.373 0.000 0.000 1.000 0.485 88 1.000 60 0.000 n/a
CASH_TAX_GOAL 236 0.254 0.000 0.000 1.000 0.436 88 0.000 60 1.000 n/a
lnASSETS 236 8.031 6.770 8.004 9.208 1.782 88 8.082 60 8.175
LEVERAGE 236 0.153 0.019 0.120 0.244 0.155 88 0.183 60 0.171
TAX_HAVEN 236 0.661 0.000 1.000 1.000 0.474 88 0.678 60 0.567
INVENTORY_INTENSITY 236 0.106 0.013 0.096 0.163 0.097 88 0.113 60 0.095
R&D 236 0.030 0.000 0.010 0.035 0.048 88 0.026 60 0.041
CAPITAL_EXPENDITURES 236 0.040 0.019 0.035 0.057 0.030 88 0.045 60 0.049
ROA 236 0.084 0.036 0.079 0.132 0.092 88 0.107 60 0.066 **
NOL 236 0.424 0.000 0.000 1.000 0.495 88 0.420 60 0.383
NOL 236 0.038 0.000 0.000 0.000 0.296 88 0.011 60 0.050
FOREIGN_INCOME 236 0.029 0.000 0.012 0.044 0.043 88 0.023 60 0.026

*, **, and *** denote significance at the p < 0.10, 0.05, and 0.01 levels (one-tailed test for dependent variables, two-tailed tests for independent variables),
respectively. See Appendix for full variable definitions. The data are drawn from COMPUSTAT for 236 firm-year observations based on 40 of our survey
respondents for which all data are available for at least one year during 2007-2012. The period was chosen as UTB (unrecognized tax benefit, or FIN 48 tax reserve)
is available in COMPUSTAT only during 2007-2012.The variables are selected using the Hoopes, Mescall, and Pittman (2012) model. Note that in panel A, 88
firm-year observations (15 of the 40 firms) selected compliance without selecting cash taxes as a goal of their transfer pricing strategy; 60 firm-year observations (10
of the 40 firms) selected cash taxes without selecting compliance as a goal of their transfer pricing strategy; and the remaining 88 firm-year observations (15 of the
40 firms) selected neither goal while no firms selected both goals.

This article is protected by copyright. All rights reserved

TABLE 7
Cross-sectional tests of the association between effective tax rates and transfer pricing strategies and practices (2007-2012)
Dependent variable: GAAP ETR
Cross-sectional variable (CS_VAR): FOREIGN_INCOME TAX_HAVEN R&D
(1a) (1b) (2a) (2b) (3a) (3b)
Pred. Coefficient Coefficient Coefficient Coefficient Coefficient Coefficient
Variable Sign (t-stat) (t-stat) (t-stat) (t-stat) (t-stat) (t-stat)
CASH_TAX_GOAL - -1.226 ** -0.93 ** -0.105 *** -0.129 *** -1.414 *** -0.629 *
× CS_VAR (-2.49) (-2.06) (-2.81) (-4.30) (-3.25) (-1.72)
COMPLIANCE_GOAL ? -0.057 0.016 -1.185 **
× CS_VAR (-0.14) (0.47) (-2.20)
CASH_TAX_GOAL - -0.045 ** -0.111 *** -0.028 -0.074 *** -0.036 * -0.12 ***
(-1.98) (-5.46) (-1.01) (-3.23) (-1.66) (-5.16)
COMPLIANCE_GOAL + 0.04 * 0.022 0.066 ***
(1.79) (0.80) (2.82)
FOREIGN_INCOME -0.644 ** -0.869 *** -0.984 *** -1.586 *** -1.029 *** -1.729 ***
(-2.59) (-2.66) (-5.14) (-6.81) (-5.26) (-6.53)
TAX_HAVEN -0.026 -0.065 *** -0.001 0.04 * 0.006 -0.012
(-1.42) (-3.72) (-0.05) (1.72) (0.31) (-0.59)
R&D -0.494 *** -0.963 *** -0.363 ** -0.821 *** 0.554 -0.550
(-3.03) (-5.35) (-2.29) (-4.83) (1.52) (-1.47)
lnASSETS 0.006 0.025 *** -0.000 0.004 0.012 ** 0.017 **
(1.09) (3.81) (-0.05) (0.72) (2.06) (2.53)
LEVERAGE -0.037 -0.141 ** -0.014 -0.125 ** -0.041 -0.183 ***
(-0.68) (-2.57) (-0.27) (-2.39) (-0.77) (-3.06)
INVENTORY_INTENSITY 0.149 0.519 *** 0.126 0.449 *** 0.349 *** 0.68 ***
(1.36) (4.15) (1.19) (3.81) (3.04) (5.07)
CAPITAL_EXPENDITURES -0.675 ** -0.236 -0.514 * -0.338 -0.376 -0.200
(-2.15) (-0.80) (-1.69) (-1.20) (-1.22) (-0.62)
ROA 0.496 *** 0.329 *** 0.475 *** 0.306 *** 0.458 *** 0.213 **
(5.41) (3.75) (5.55) (3.72) (5.06) (2.16)
NOL 0.001 0.027 0.005 0.016 0.014 0.020
(0.07) (1.51) (0.37) (0.92) (0.91) (0.98)
NOL 0.012 -0.009 0.005 -0.027 0.012 -0.006
(0.50) (-0.33) (0.22) (-1.07) (0.50) (-0.20)
Constant 0.225 *** -0.051 0.337 *** 0.691 *** 0.224 *** 0.605 ***
(3.75) (-0.67) (5.66) (9.07) (3.40) (6.90)
Industry Controls? YES YES YES YES YES YES
Year Controls? YES YES YES YES YES YES
Number of Observations 236 148 236 148 236 148
Adjusted R2 42.7% 70.4% 46.6% 71.9% 43.8% 64.9%

*, **, and *** denote significance at the p < 0.10, 0.05, and 0.01 levels (all two-tailed), respectively. See Appendix for full variable definitions.
The _GOAL variable data are drawn from this study's tax survey conducted in 2010. The remaining variables are drawn from COMPUSTAT.
The _GOAL variables are back- and forward-filled with the response provided by our survey respondents in 2010. The CS_VAR variable
represents FOREIGN_INCOME in Columns (1a) and (1b), TAX_HAVEN in Columns (2a) and (2b), and R&D in columns (3a) and (3b). The
sample includes publicly traded firms that provided their identity in our survey and that had all available variables during 2007-2012 using the
Hoopes, Mescall, and Pittman (2012) model. All models use robust standard errors clustered by firm.

TABLE 8

This article is protected by copyright. All rights reserved

Multivariate regression results using COMPUSTAT data of the association between FIN 48 tax reserves and transfer pricing
strategies and practices (2007-2012)
Dependent variable: UTB/Assets (1) (2) (3)
Coefficient Coefficient Coefficient
Variable (t-stat) (t-stat) (t-stat)
CASH_TAX_GOAL −0.001 0.009 ***
(−1.21) (10.76)
COMPLIANCE_GOAL −0.003 ***
(−3.63)
CASH_TAX_GOAL_ALL −0.001
(−0.93)
COMPLIANCE_GOAL_ALL −0.002 ***
(−3.30)
COMPLIANCE_GOAL_ALL 0.004 ***
× CASH_TAX_GOAL_ALL (2.79)
lnASSETS −0.001 *** −0.001 *** −0.003 ***
(−5.77) (−5.62) (−13.39)
LEVERAGE 0.004 * 0.004 −0.008 ***
(1.79) (1.60) (−3.19)
TAX_HAVEN −0.000 −0.000 0.001
(−0.09) (−0.18) (1.42)
INVENTORY INTENSITY 0.001 0.001 0.032 ***
(0.29) (0.13) (5.15)
R&D −0.013 * −0.013 * 0.215 ***
(−1.89) (−1.91) (26.56)
CAPITAL EXPENDITURES 0.016 0.017 −0.026** **
(1.21) (1.34) (−2.02)
ROA 0.009 ** 0.009 ** −0.026 ***
(2.49) (2.55) (−6.95)
NOL −0.001 −0.001 −0.009 ***
(−1.61) (−1.39) (−10.91)
NOL −0.001 −0.001 0.004 ***
(−1.09) (−1.00) (2.97)
FOREIGN INCOME 0.001 0.000 0.072 ***
(0.15) (0.01) (6.34)
Constant 0.014 *** 0.013 *** 0.033 ***
(6.04) (4.88) (9.75)
Industry Controls? YES YES YES
Year Controls? YES YES YES
Observations 212 212 135
Adjusted R2 53.8% 53.6% 93.8%

*, **, and *** denote significance at the p < 0.10, 0.05, and 0.01 levels (all two-tailed), respectively. See Appendix for full
variable definitions. The _GOAL variable data are drawn from this study's tax survey conducted in 2010. The remaining
variables are drawn from COMPUSTAT. The sample includes publicly traded firms that provided their identity in our survey
and that had all available variables during 2007-2012 using the Hoopes, Mescall, and Pittman (2012) model. The sample period
begins in 2007 because this was the first year of FIN 48 reporting. The _GOAL variables are back- and forward-filled with the
response provided by our survey respondents in 2010. All models use robust standard errors clustered by firm.

This article is protected by copyright. All rights reserved