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Production location of multinational firms under transfer pricing: the impact of the arm's length principle

Author

Listed:
  • Kato, Hayato
  • Okoshi, Hirofumi

Abstract

When multinational enterprises (MNEs) separate the geographical location of affiliates, they can shift profits between the affiliates by manipulating intra-firm prices of inputs. We show that if the international tax difference between the parent and the host countries is large, MNEs choose to separately locate their affiliates in the two countries. We also investigate the impact of the arm's length principle (ALP) on the location choice, which requires that the intra-firm price of inputs should be set equal to the price of similar inputs for the independent downstream firms. The ALP may change the location choice of MNEs, bringing smaller tax revenues to the host country, but greater revenues globally.

Suggested Citation

  • Kato, Hayato & Okoshi, Hirofumi, 2019. "Production location of multinational firms under transfer pricing: the impact of the arm's length principle," Munich Reprints in Economics 78284, University of Munich, Department of Economics.
    • Handle: RePEc:lmu:muenar:78284
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    Cited by:

    1. Hayato Kato & Hirofumi Okoshi, 2022. "Economic Integration And Agglomeration Of Multinational Production With Transfer Pricing," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 63(3), pages 1325-1355, August.
    2. Kopel, Michael & Löffler, Clemens, 2023. "Tax differences and international location strategies," International Journal of Production Economics, Elsevier, vol. 256(C).
    3. Hiroshi Mukunoki & Hirofumi Okoshi, 2021. "Tariff elimination versus tax avoidance: free trade agreements and transfer pricing," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(5), pages 1188-1210, October.
    4. Alexander Georgievich Gurinovich & Marina Afanasyevna Lapina & Alexey Evgenievich Ivanov, 2020. "Ways of Restricting the Rights of Taxpayers Under Agreements for the Avoidance of Double Taxation in National Legislation," SAGE Open, , vol. 10(4), pages 21582440209, October.
    5. CHOI, Jay Pil & FURUSAWA, Taiji & ISHIKAWA, Jota & 石川, 城太, 2018. "Transfer Pricing and the Arm's Length Principle under Imperfect Competition," Discussion paper series HIAS-E-73, Hitotsubashi Institute for Advanced Study, Hitotsubashi University.
    6. Hiroshi MUKUNOKI & Hirofumi OKOSHI, 2022. "Antidumping on Tax-induced Dumping," Discussion papers 22063, Research Institute of Economy, Trade and Industry (RIETI).
    7. Hirofumi Okoshi, 2025. "Attractive target for tax avoidance: trade liberalization and entry mode," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 32(1), pages 238-270, February.
    8. Hirofumi OKOSHI, 2021. "Innovation for Tax Avoidance: Product Differentiation and the Arm's Length Principle," Discussion papers 21038, Research Institute of Economy, Trade and Industry (RIETI).
    9. Hayato Kato & Hirofumi Okoshi, 2019. "Production location of multinational firms under transfer pricing: the impact of the arm’s length principle," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 26(4), pages 835-871, August.
    10. Hirofumi OKOSHI, 2024. "Negotiation for Transfer Prices under the Arm's Length Principle," Discussion papers 24026, Research Institute of Economy, Trade and Industry (RIETI).
    11. Hiroshi Mukunoki & Hirofumi Okoshi, 2025. "Wake Not a Sleeping Lion: Free Trade Agreements and Decision Rights in Multinationals," Review of International Economics, Wiley Blackwell, vol. 33(3), pages 505-518, August.

    More about this item

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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