Tax-efficient supply chain allocation in a competitive environment

Many regulations have been enacted to prevent the multinational firm's (MNF's) tax avoidance and cause the enforcement cost of incoming shifting. This paper investigates the impact of the enforcement cost on a firm's tax-efficient supply chain allocation strategy, wherein the firm can either create a research and development (R&D) center that innovates the intangible assets or create a distributor that acts as a marketing hub, in a low tax region to explore tax arbitrage. We show that when the firm engages in market competition and the impact of the enforcement cost is low, it prefers to create a distributor in the low tax region to align the benefits of tax saving and internal coordination. While if the impact of the enforcement cost is high, the firm prefers R&D center in the low tax region that can effectively mitigate the enforcement cost and achieve tax saving. When the market competition becomes more intense, the firm becomes more likely to choose R&D center in the low tax region to alleviate market competition. In this scenario, the social welfare is always higher when the firm allocates distributor in the low tax region. When an external supplier exists, the firm is still more likely to choose R&D center in the low tax region to reduce the supplier's wholesale price. What's more, in the presence of external supplier, the social welfare can be higher under either allocation format.