Reference : Transfer pricing rules, OECD guidelines, and market distortions
Scientific journals : Article
Business & economic sciences : Microeconomics
Transfer pricing rules, OECD guidelines, and market distortions
Behrens, Kristian [Université Catholique de Louvain - UCL]
Peralta, Susana [Universidade Nova de Lisboa]
Picard, Pierre M. mailto [University of Luxembourg > Faculty of Law, Economics and Finance (FDEF) > Center for Research in Economic Analysis (CREA) >]
Journal of Public Economic Theory
Blackwell Publishing
Yes (verified by ORBilu)
[en] transfer pricing ; OECD guidelines ; multinationals and exporters ; organizational choice ; arm's length
[en] 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 a¢ liate; 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.
Researchers ; Students

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