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The non-neutrality of the arm's length principle with imperfect competition

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  • Moreno Ruiz, Diego
  • Lemus Torres, Ana Belén

Abstract

The Arm’s Length Principle (ALP) has been broadly adopted by OECD countries to avoid the use of firm’s 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 its adoption is non-neutral under imperfect competition: a strict (lax) application of the ALP softens competition among subsidiaries (parents). Thus, under imperfect competition optimal transfer pricing regulations must account for their impact on market outcomes, as well as for their impact on tax revenue.

Suggested Citation

  • Moreno Ruiz, Diego & Lemus Torres, Ana Belén, 2011. "The non-neutrality of the arm's length principle with imperfect competition," UC3M Working papers. Economics we1134, Universidad Carlos III de Madrid. Departamento de Economía.
  • Handle: RePEc:cte:werepe:we1134
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    File URL: https://e-archivo.uc3m.es/bitstream/handle/10016/12639/we_11_34.pdf?sequence=1
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    References listed on IDEAS

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    1. Anil Arya & Brian Mittendorf, 2008. "Pricing Internal Trade to Get a Leg up on External Rivals," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 17(3), pages 709-731, September.
    2. Tim Baldenius & Stefan Reichelstein, 2006. "External and Internal Pricing in Multidivisional Firms," Journal of Accounting Research, Wiley Blackwell, vol. 44(1), pages 1-28, March.
    3. Jack Hirshleifer, 1956. "On the Economics of Transfer Pricing," The Journal of Business, University of Chicago Press, vol. 29, pages 172-172.
    4. Charles E. Hyde & Chongwoo Choe, 2005. "Keeping Two Sets of Books: The Relationship Between Tax and Incentive Transfer Prices," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 14(1), pages 165-186, March.
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    Cited by:

    1. 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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    Keywords

    Vertical separation;

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