Transfer Pricing and the Arm's Length Principle under Imperfect Competition

Arbeitspapier

This paper analyzes incentives of a multinational enterprise to manipulate an internal transfer price to take advantage of corporate-tax differences across countries under both monopoly and oligopoly. We examine “cost plus” and “comparable uncontrollable price” as two alternative implementations of the so-called arm’s length principle (ALP) to mitigate this problem. Tax-induced foreign direct investment (FDI) may entail inefficient internal production. We show how the mechanisms behind such inefficient FDI differ between alternative implementation schemes of the ALP and explore implications of the ALP for welfare and dual sourcing incentives. We also develop a novel theory of vertical foreclosure as an equilibrium outcome of strategic transfer pricing.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 7303

Classification and Topics

• Classification: Wirtschaft ; Models of Trade with Imperfect Competition and Scale Economies; Fragmentation ; Multinational Firms; International Business ; Tax Evasion and Avoidance ; Monopoly; Monopolization Strategies ; Oligopoly and Other Imperfect Markets ; Economics of Regulation ; Industrial Policy; Sectoral Planning Methods
• Subject: foreign direct investment ; multinational enterprise ; corporate tax ; transfer pricing ; arm’s length principle ; vertical foreclosure

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Choi, Jay Pil ; Furusawa, Taiji ; Ishikawa, Jota
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2018

Further information

• Handle: http://hdl.handle.net/10419/185501
• Last update: 10.03.2025, 11:42 AM CET