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Transfer pricing rules, OECD guidelines, and market distortions

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  • BEHRENS, Kristian

    () (Department of Economics, Université du Québec, Montréal, Canada; Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium; CIRPEE, Canada; and CEPR, London.)

  • PERALTA, Susana

    () (Faculdade de Economia, Universidade Nova de Lisboa, Portugal; Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium, and CEPR, London)

  • PICARD, Pierre

    () (CREA, Université du Luxembourg, Luxembourg; Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium)

Abstract

We 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.

Suggested Citation

  • 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).
  • Handle: RePEc:cor:louvco:2009067
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    References listed on IDEAS

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    Cited by:

    1. Ronald B. Davies & Julien Martin & Mathieu Parenti & Farid Toubal, 2018. "Knocking on Tax Haven’s Door: Multinational Firms and Transfer Pricing," The Review of Economics and Statistics, MIT Press, vol. 100(1), pages 120-134, March.
    2. 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.
    3. 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.
    4. Choe, Chongwoo & Matsushima, Noriaki, 2013. "The arm's length principle and tacit collusion," International Journal of Industrial Organization, Elsevier, vol. 31(1), pages 119-130.

    More about this item

    Keywords

    transfer pricing; OECD guidelines; multinationals and exporters; organizational choice; arm's length principle;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • 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

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