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

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  • 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

  • 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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    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.
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    6. 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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    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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    More about this item

    Keywords

    Transfer pricing regulation;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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