Strategic incentives for keeping one set of books under the Arm's Length Principle Articles uri icon

publication date

  • July 2020

start page

  • 78

end page

  • 90

volume

  • 106

International Standard Serial Number (ISSN)

  • 0165-4896

Electronic International Standard Serial Number (EISSN)

  • 1879-3118

abstract

  • The OECD's recommendation that transfer prices between multinational
    enterprises and their subsidiaries be consistent with the Arm's Length Principle
    (ALP) for tax purposes does not restrict internal pricing policies. However,
    we show that under imperfect competition …rms may choose to keep one set of
    books (i.e., to set transfer prices consistent with the ALP), as a way of softening
    competition in the external market. As a result, firms' profits are greater,
    and the surplus is smaller, than under vertical integration. In contrast, when
    firms keep two sets of books (i.e., their transfer prices di¤er from those used
    for tax purposes), competition intensifies in both markets relative to vertical
    integration.

subjects

  • Economics

keywords

  • transfer pricing regulation; arm's length principle; imperfect competition; vertical separation