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The Non-Neutrality of the Arm's Length Principle with Imperfect Competition

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  • Lemus Torres, Ana Belén
  • Moreno, Diego

Abstract

The Arm's Length Principle (ALP) has been broadly adopted by OECD countries to avoid the use of firms' internal transfer pricing as a device for shifting profits into low tax jurisdictions. While the ALP does not affect market outcomes under perfect competition, we show that under imperfect competition its adoption is non-neutral: a strict (lax) application of the ALP softens competition among subsidiaries (parents). Thus, under imperfect competition regulating transfer pricing optimally requires trading off its impact on market outcomes and tax revenue.

Suggested Citation

  • Lemus Torres, Ana Belén & Moreno, Diego, 2019. "The Non-Neutrality of the Arm's Length Principle with Imperfect Competition," UC3M Working papers. Economics 28640, Universidad Carlos III de Madrid. Departamento de Economía.
    • Handle: RePEc:cte:werepe:28640
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    Cited by:

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    2. Lemus Torres, Ana Belén, 2011. "Strategic incentives for kepping one set of books under the Arm's Length Principle," UC3M Working papers. Economics we1135, Universidad Carlos III de Madrid. Departamento de Economía.

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    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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