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Formula Apportionment and Transfer Pricing under Oligopolistic Competition

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  • S¯ren Bo Nielsen

    ()
    (Copenhagen Business School, EPRU, CEPR, and CESifo,)

  • Pascalis Raimondos-M¯ller
  • Guttorm Schjelderup

Abstract

This paper demonstrates that under conditions of imperfect (oligopolistic) competition, a transition from separate accounting (SA) to formula apportionment (FA) does not eliminate the problem of profit shifting via transfer pricing. In particular, if affiliates of a multinational firm face oligopolistic competition, it is beneficial for the multinational to manipulate transfer prices for tax-saving as well as strategic reasons under both FA and SA. The analysis shows that a switch from SA rules to FA rules may actually strengthen profit shifting activities by multinationals. Copyright 2003 Blackwell Publishing Inc..

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Article provided by Association for Public Economic Theory in its journal Journal of Public Economic Theory.

Volume (Year): 5 (2003)
Issue (Month): 2 (04)
Pages: 419-437

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Handle: RePEc:bla:jpbect:v:5:y:2003:i:2:p:419-437

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  1. Gordon, Roger H & Wilson, John Douglas, 1986. "An Examination of Multijurisdictional Corporate Income Taxation under Formula Apportionment," Econometrica, Econometric Society, Econometric Society, vol. 54(6), pages 1357-73, November.
  2. Chaim Fershtman & Kenneth L Judd, 1984. "Equilibrium Incentives in Oligopoly," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 642, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Caillaud, Bernard & Jullien, B & Picard, P, 1995. "Competing Vertical Structures: Precommitment and Renegotiation," Econometrica, Econometric Society, Econometric Society, vol. 63(3), pages 621-46, May.
  4. Guttorm Schjelderup & Alfons J. Weichenrieder, 1999. "Trade, Multinationals, and Transfer Pricing Regulations," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 32(3), pages 817-844, May.
  5. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262200716, December.
  6. Steven D. Sklivas, 1987. "The Strategic Choice of Managerial Incentives," RAND Journal of Economics, The RAND Corporation, vol. 18(3), pages 452-458, Autumn.
  7. Michael Keen, 1993. "The welfare economics of tax co-ordination in the European Community : a survey," Fiscal Studies, Institute for Fiscal Studies, Institute for Fiscal Studies, vol. 14(2), pages 15-36, February.
  8. Guttorm Schjelderup & Lars Sorgard, 1997. "Transfer Pricing as a Strategic Device for Decentralized Multinationals," International Tax and Public Finance, Springer, Springer, vol. 4(3), pages 277-290, July.
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