Tax havens and cross-border licensing with transfer pricing regulation

Jay Pil Choi, Jota Ishikawa, Hirofumi Okoshi

Research output: Contribution to journalArticlepeer-review


Multinational enterprises (MNEs) have incentive to reduce tax payment through transfer pricing. The incentive is stronger when MNEs own intangibles, because it is easy to transfer them across countries. To mitigate such strategic tax planning, the OECD proposes the arm’s length principle (ALP). This paper deals with technology patents as an example of intangibles and investigates how the ALP affects MNEs’ licensing strategies and welfare in a model with a tax haven. The ALP may distort MNEs’ licensing decisions, because providing a license to unrelated firms restricts MNEs’ profit-shifting opportunities due to the emergence of comparable transaction. Interestingly, the termination of licensing in the presence of the ALP may worsen domestic welfare if the (potential) licensee and the MNE’s subsidiary do not compete in the domestic market but may improve welfare if they compete. The results under ad valorem royalty are in distinct contrast with those under per-unit royalty.

Original languageEnglish
JournalInternational Tax and Public Finance
Publication statusAccepted/In press - 2022


  • Arm’s length principle
  • Intangibles
  • Licensing
  • Multinational enterprises
  • Transfer pricing

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics


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