Duopolistic Competition, Taxes, and the Arm's-Length Principle
AbstractNumerous (high-tax) countries presume that multinational firms use their transfer-pricing policies to shift profits into countries with lower tax rates. To avoid the corresponding loss in tax revenues, tax authorities develop constantly tightening rules to curb transfer-price distortions. Affected firms include the decision of compliance to these rules into their strategic considerations. In a scenario with arm's-length regulation in two countries, we analyze the transfer-pricing policy of a firm that uses the same transfer price for tax and managerial incentive purposes. Thus, the transfer-pricing policy is driven by three issues: interaction with competitors, minimization of tax burden, and avoidance of punishments. The model shows that tighter transfer-pricing rules may help firms to mitigate competition and to increase their profits and that non-compliance to the arm's-length principle is part of their equilibrium strategy.
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Bibliographic InfoPaper provided by Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät in its series Hannover Economic Papers (HEP) with number dp-378.
Length: 22 pages
Date of creation: Oct 2007
Date of revision:
transfer prices; taxes; arm's-length principle; one set of books; duopolistic competition; enforcement.;
Find related papers by JEL classification:
- H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
- L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
- M40 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - General
This paper has been announced in the following NEP Reports:
- NEP-ACC-2007-11-03 (Accounting & Auditing)
- NEP-ALL-2007-11-03 (All new papers)
- NEP-COM-2007-11-03 (Industrial Competition)
- NEP-IND-2007-11-03 (Industrial Organization)
- NEP-MIC-2007-11-03 (Microeconomics)
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- Ana B. Lemus, 2011. "Strategic incentives for kepping one set of books under the Arm's Length Principle," Economics Working Papers we1135, Universidad Carlos III, Departamento de Economía.
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