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.
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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.;
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