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Transfer pricing rules and competing governments

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  • Pascalis Raimondos-M¯ller

Abstract

The literature on the regulation of multinationals' transfer prices has not considered the possibility that governments may use transfer pricing rules strategically when they compete with other governments. The present paper analyses this case and shows that, even in the absence of agency considerations, a non-cooperative equilibrium is characterised by above-optimal levels of effective taxation. We then derive conditions under which harmonization of transfer pricing rules lead to a Pareto improvement, and show that harmonization according to the 'arm's length' principle--the form of harmonization advocated by the OECD--may not be Pareto improving. Copyright 2002, Oxford University Press.

Suggested Citation

  • Pascalis Raimondos-M¯ller, 2002. "Transfer pricing rules and competing governments," Oxford Economic Papers, Oxford University Press, vol. 54(2), pages 230-246, April.
  • Handle: RePEc:oup:oxecpp:v:54:y:2002:i:2:p:230-246
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    References listed on IDEAS

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    Cited by:

    1. Peralta, Susana & Wauthy, Xavier & van Ypersele, Tanguy, 2006. "Should countries control international profit shifting?," Journal of International Economics, Elsevier, pages 24-37.
    2. Jean Hindriks & Susana Peralta & Shlomo Weber, 2014. "Local Taxation of Global Corporation: A Simple Solution," Annals of Economics and Statistics, GENES, pages 37-65.
    3. Tomáš Buus & Jaroslav BRADA, 2010. "VAT and Tax Credits: A Way to Eliminate Tax-Evasive Use of Transfer Prices?," European Financial and Accounting Journal, University of Economics, Prague, vol. 2010(1), pages 28-50.
    4. 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.
    5. Tomáš Buus & Jaroslav Brada, 2008. "On the Properties of Transfer Pricing Rules," Český finanční a účetní časopis, University of Economics, Prague, vol. 2008(3), pages 39-55.
    6. 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.
    7. Jie Ma & Pascalis Raimondos-Møller, 2015. "Competition for FDI and Profit Shifting," CESifo Working Paper Series 5153, CESifo Group Munich.
    8. Norbäck, Pehr-Johan & Persson, Lars & Vlachos, Jonas, 2006. "Cross-Border Acquisitions and Corporate Taxes: Efficiency and Tax Revenues," Working Paper Series 663, Research Institute of Industrial Economics.
    9. Kristian Behrens & Susana Peralt & Pierre M. Picard, 2014. "Transfer Pricing Rules, OECD Guidelines, and Market Distortions," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 16(4), pages 650-680, August.
    10. Devereux, Michael P. & Lockwood, Ben & Redoano, Michela, 2008. "Do countries compete over corporate tax rates?," Journal of Public Economics, Elsevier, pages 1210-1235.
    11. Jaroslav BRADA & Tomáš Buus, 2009. "Detection of Possible Tax-Evasive Transfer Pricing in Multinational Enterprises," European Financial and Accounting Journal, University of Economics, Prague, vol. 2009(2), pages 65-78.

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