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

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URI: https://hdl.handle.net/10016/28640
ISSN: 2340-5031
UXXI: DT/0000001719
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we1913.pdf (1.05 MB)
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2019-07
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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.
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Transfer Pricing Regulation, Arm'S Length Principle, Imperfect Competition, Vertical Separation
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DE - Working Papers. Economics. WE