Strategic incentives for kepping one set of books under the Arm's Length Principle
AbstractThe OECD recommendation that transfer prices between parent firms and their subsidiaries be consistent with the Arm's Length Principle (ALP) for tax purposes does not restrict internal pricing policies. I show that under imperfect competition parents' accounting policies determine the properties of market outcomes: if parents keep one set of books (i.e., their internal transfer prices are consistent with the ALP), then competition in the external (home) market softens (intensifies) relative to the equilibrium where parents and subsidiaries are integrated. In contrast, if firms keep two sets of books (i.e., their internal transfer prices differ from those used for tax purposes) or maintain asymmetric accounting policies, then competition intensifies in both markets. Keeping one set of books is equilibrium in most of the parameter space.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number we1135.
Date of creation: Nov 2011
Date of revision:
Transfer pricing regulation; Arm´s Length Principle; imperfect competition; vertical separation.;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Nielsen, Søren Bo & Raimondos-Møller, Pascalis & Schjelderup, Guttorm, 2006.
"Taxes and Decision Rights in Multinationals,"
07-2006, Copenhagen Business School, Department of Economics.
- Nielsen, Soren Bo & Raimondos-Møller, Pascalis & Schjelderup, Guttorm, 2006. "Taxes and Decision Rights in Multinationals," CEPR Discussion Papers 5952, C.E.P.R. Discussion Papers.
- Nielsen, Søren Bo & Raimondos-Møller, Pascalis & Schjelderup, Guttorm, 2007. "Taxes and Decision Rights in Multinationals," Discussion Papers 2007/11, Department of Business and Management Science, Norwegian School of Economics.
- Alan Auerbach & Michael P Devereux & Helen Simpson, 2007.
"Taxing corporate income,"
0705, Oxford University Centre for Business Taxation.
- Choe, Chongwoo & Matsushima, Noriaki, 2011.
"The Arm's Length Principle and Tacit Collusion,"
37295, University Library of Munich, Germany, revised 12 Mar 2012.
- Charles E. Hyde & Chongwoo Choe, 2005. "Keeping Two Sets of Books: The Relationship Between Tax and Incentive Transfer Prices," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 14(1), pages 165-186, 03.
- A. Lemus & Diego Moreno, 2011. "The non-neutrality of the arm's length principle with imperfect competition," Economics Working Papers we1134, Universidad Carlos III, Departamento de Economía.
- Korn, Evelyn & Lengsfeld, Stephan, 2007. "Duopolistic Competition, Taxes, and the Arm's-Length Principle," Diskussionspapiere der Wirtschaftswissenschaftlichen FakultÃ¤t der Leibniz UniversitÃ¤t Hannover dp-378, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
- Anil Arya & Brian Mittendorf, 2008. "Pricing Internal Trade to Get a Leg up on External Rivals," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 17(3), pages 709-731, 09.
- Moreno, Diego & Ubeda, Luis, .
"Capacity precommitment and price competition yield cournot outcomes,"
Open Access publications from Universidad Carlos III de Madrid
info:hdl:10016/252, Universidad Carlos III de Madrid.
- Diego Moreno & Luis Úbeda, 2001. "Capacity precommitment and price competition yield Cournot outcomes," Economics Working Papers we014408, Universidad Carlos III, Departamento de Economía.
- Ware, Roger, 1985. "Inventory Holding as a Strategic Weapon to Deter Entry," Economica, London School of Economics and Political Science, vol. 52(205), pages 93-101, February.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.