Order timing and tax planning when selling to a rival in a low-tax emerging market

Abstract

Many one-belt-one-road (OBOR) markets are attracting multinational firms (MNFs) by offering preferential tax policies. Being aware of this, should a MNF build a retailing division in the low-tax OBOR market for the benefits of tax-planning, especially when there exists local competition? To answer this question, we consider a co-opetitive supply chain comprising a Chinese MNF and his local rival, who buys goods from the MNF for reselling. The MNF has a manufacturing division located in a high-tax region and a retailing division in the low-tax OBOR market. Both the MNF’s retailing division (at a transfer price) and his local rival (at a wholesale price) source from the MNF’s manufacturing division. We focus on the MNF’s order timing decisions. Interestingly, we find that, the MNF might give up the first-mover advantage by charging his local rival a high wholesale price and reducing his own sales volume, when the tax difference is small. In contrast, when the tax difference is large, the MNF prefers early ordering and hence, charge the local rival a low wholesale price. We further study supply chain sustainability issues, and identify a moderate range of the tax difference, where the MNF’s early ordering results in both profitable sustainability and environmental sustainability.