Transfer Pricing Rules, OECD Guidelines, and Market Distortions
AbstractWe study the impact of transfer pricing rules on sales prices, firms’ organizational structure, and consumers’ utility within a two-country monopolistic competition model featuring source-based profit taxes that differ across countries. Firms can either become multinationals, i.e., they serve the foreign market through a fully controlled affiliate; or they can become exporters, i.e., they serve the foreign market by contracting with an independent distributor. Compared to the benchmark cases, where tax authorities are either unable to audit firms or where they are able to audit them perfectly, the use of the OECD’s Comparable Uncontrolled Price (CUP) or Cost-Plus (CP) rule distorts firms’ output and pricing decisions. The reason is that the comparable arm’s length transactions between exporters and distributors, which serve as benchmarks, are not efficient. We show that implementing the CUP or CP rules is detrimental to consumers in the low tax country, yet benefits consumers in the high tax country.
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Bibliographic InfoPaper provided by CIRPEE in its series Cahiers de recherche with number 0943.
Date of creation: 2009
Date of revision:
Transfer pricing; OECD guidelines; multinationals and exporters; organizational choice; arm's length principle;
Other versions of this item:
- Kristian Behrens & Susana Peralta & Pierre M. Picard, 2010. "Transfer pricing rules, OECD guidelines, and market distortions," CREA Discussion Paper Series 10-20, Center for Research in Economic Analysis, University of Luxembourg.
- BEHRENS, Kristian & PERALTA, Susana & PICARD, Pierre, 2009. "Transfer pricing rules, OECD guidelines, and market distortions," CORE Discussion Papers 2009067, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies
- H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
- H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion
- H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
- L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-11-07 (All new papers)
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