Abstract
We study the problem of two governments who want to impose tax schedule combined with profit tax rate and lump-sum tax on a vertical integrated multinational enterprise under transfer pricing regulation non-cooperatively . When the multinational enterprise's cost is complete information, the bset stragtegy for the governments is to use lump-sum tax to collect the tax revenue and expand their tax base by reducing the profit tax rate. Besides, we also examine how the governments design the optimal tax schedule if the cost is private information. When the two governmente are cooperative and the transfer pricing rules are identical, the cooperative government's best strategy is to design a nonlinear tax schedule to extract multinational's private information; however, when the transfer pricing rule are not the same, the cooperative government will have to weigh the tradeoff between the gain of rent extraction and the distortion of the tax base.If the distortion of tax base is not too much, the optimal profit tax function will increase with the multinational's cost. Finally, we apply the common agent model to study the non-cooperative case when multinational has private information. Since the two government cannot use their tax scheule to affect the multinational's choice on other country's tax rate, two governments will still implement rent extraction stragtegy as their optimal tax schedule, which further reduce the multinational's output level.