Part 1 - AL-Tax

International Taxation Handbookbound to laws and administrative procedures, around which the taxpayer maydesign his or her tax strategy. As a consequence of asymmetric information, and to thedisadvantage of the tax authority, the state does not negotiate with the taxpayer aboutthe identification of facts and the determination of the tax base. In this asymmetricalsituation (hence a hybrid or market governance structure where the tax authority bargainswith the taxpayer about the assessment of the tax case), negotiation seems tobe less efficient. Because of the high costs of establishing and maintaining probity,an opportunistic (cheating) taxpayer would generate lower revenues for the stateagency under a nonbureaucratic governance structure.Following Hart (1995, p. 20; see also Hart and Moore, 2005), a transaction costefficientchoice for a governance structure does not reduce asymmetric informationper se. Likewise for taxation, public-bureaucratic taxation cannot eliminate theinformation problem for the public agency (tax authority). Rather, from a TCE pointof view, the sovereign’s choice to resort to public bureaucracy in generating revenuecan be explained as such: Equalizing information is too costly for the state so it hasto resort to bureaucratic tax collection. 10‘Try markets, try hybrids, try firms, try regulation, and resort to public bureausonly when all else fails.’(Williamson, 1998, p. 47)6.3.3 Taxing multinationals: Two-sided asymmetric informationIn a purely one-jurisdictional situation, taxation may be a transaction which ispreferably (efficiently) governed by bureaucracy – with respect to internal coordinationas well as regarding external relationships. However, if MNCs are to betaxed, the parties on both sides of taxation face asymmetric information affiliatedwith measurement and specificity problems: MNC taxpayers lack ex-ante informationabout the ex-post assessment of its transfer prices; The taxing state lacks – asindicated above – information about the true case facts. In the field of transfer pricing,the taxpayers are not able to foresee whether a tax authority will accept theTPM and the tax base deployed in a given transfer pricing case. They are alsounaware if, and to what degree, the filed tax base allocation between the legal entitiesof the MNC will be adjusted by the authorities in the audit process several yearslater.This results in hazards not only for the tax authority, but also for the taxpayer. Inthe international context of transfer pricing and corporate income tax base allocation,130