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Transfer pricing and enforcement policy in oligopolistic markets

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  • AMERIGHI, Oscar

Abstract

In this paper we set up a symmetric two-country model with trade costs and international ownership to study the transfer pricing decisions by two multinationals operating in markets with Cournot competition. We let governments choose both the corporate profit tax rate and the level of enforcement of the "arm's length" principle and we examine how enforcement policies affect the tax competition game. Furthermore, we analyze in what direction economic integration, in terms of a reduction in trade costs and/or a larger international ownership of multinationals, influences the symmetric equilibrium level of the two policy instruments. We show that increased economic integration may lead to higher equilibrium tax rates, and that, as governments increase the level of enforcement, equilibrium tax rates increase as well. Moreover, we find that, when the two MNEs are not fully owned by domestic residents, trade liberalization decreases the equilibrium enforcement policy, while increased international ownership increases the level of enforcement.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2004069.

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Date of creation: 00 Oct 2004
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Handle: RePEc:cor:louvco:2004069

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Keywords: multinational enterprises; transfer pricing; tax competition; enforcement policy; economic integration;

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  1. Harris, D. & Morck, R. & Slemrod, J., 1991. "Income Shifting in U.S. Multinational Corporations," Working Papers 287, Research Seminar in International Economics, University of Michigan.
  2. Hines, James R, Jr & Rice, Eric M, 1994. "Fiscal Paradise: Foreign Tax Havens and American Business," The Quarterly Journal of Economics, MIT Press, vol. 109(1), pages 149-82, February.
  3. Haufler, A. & Schjelderup, G., 1999. "Corporate Tax Systems and Cross Country Profit Shifting," Papers 1/99, Norwegian School of Economics and Business Administration-.
  4. Richard E. Baldwin & Paul Krugman, 2002. "Agglomeration, Integration and Tax Harmonization," NBER Working Papers 9290, National Bureau of Economic Research, Inc.
  5. Eric J. Bartelsman & Roel Beetsma, 2000. "Why Pay More? Corporate Tax Avoidance through Transfer Pricing in OECD Countries," CESifo Working Paper Series 324, CESifo Group Munich.
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  7. Clausing, Kimberly A., 2003. "Tax-motivated transfer pricing and US intrafirm trade prices," Journal of Public Economics, Elsevier, vol. 87(9-10), pages 2207-2223, September.
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  12. Elitzur, Ramy & Mintz, Jack, 1996. "Transfer pricing rules and corporate tax competition," Journal of Public Economics, Elsevier, vol. 60(3), pages 401-422, June.
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  14. PERALTA, Susana & WAUTHY , Xavier & van YPERSELE, Tanguy, 2003. "Should countries control international profit shifting ?," CORE Discussion Papers 2003072, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  22. Kant, Chander, 1988. "Endogenous transfer pricing and the effects of uncertain regulation," Journal of International Economics, Elsevier, vol. 24(1-2), pages 147-157, February.
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  24. Harry Grubert & Timothy Goodspeed & Deborah L. Swenson, 1993. "Explaining the Low Taxable Income of Foreign-Controlled Companies in the United States," NBER Chapters, in: Studies in International Taxation, pages 237-276 National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Oscar Amerighi & Giuseppe De Feo, 2013. "Competiton for FDI and profit shifting: on the effects of subsidies and tax breaks," Working Papers 1326, University of Strathclyde Business School, Department of Economics.
  2. Amerighi, Oscar & Peralta, Susana, 2010. "The proximity-concentration trade-off with profit shifting," Journal of Urban Economics, Elsevier, vol. 68(1), pages 90-101, July.
  3. Tomáš Buus & Jaroslav BRADA, 2010. "Can Profit-shifting be Resolved by Penalization?," European Financial and Accounting Journal, University of Economics, Prague, vol. 2010(3), pages 56-74.

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