Taxes and Decision Rights in Multinationals

We examine how a multinational’s choice to centralize or decentralize its decision structure is affected by country tax differentials. Within a simple model that emphasizes the multiple conflicting roles of transfer prices in MNEs – here as a strategic pre-commitment device and a tax manipulation instrument – we show that decentralization is preferred in case of small tax differentials, whereas centralization can be more profitable when tax differentials are large. In essence, the organizational flexibility of MNEs is triggered by the scope for tax minimization. Our analysis allows for both commitment and non-commitment to transfer prices, and for alternative modes of competition.