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Foreign Subsidiary, Transfer Pricing and Tariffs

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  • Kant, Chander

Abstract

In the transfer pricing literature, Horst [12] concludes that the multinational firm (MNF) will generally charge a "low" transfer price (LTP) while other authors are ambivalent on this question. This paper shows that less than whole ownership over the subsidiary generally makes the MNF change its transfer pricing strategy: from desiring a LTP to wanting a high transfer price (HTP). The conditions for an HTP are fairly broad so that we are more likely to observe it than has been suggested in the literature. The MNF literature also presumes that the host country loses revenue due to an HTP. However, this view ignores the effects of tariffs on a government's revenue. If tariff revenue is included an HTP can increase the host country's revenue.

Suggested Citation

  • Kant, Chander, 1988. "Foreign Subsidiary, Transfer Pricing and Tariffs," MPRA Paper 91947, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:91947
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    References listed on IDEAS

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    1. Hanson, James S., 1975. "Transfer pricing in the multinational corporation: A critical appraisal," World Development, Elsevier, vol. 3(11-12), pages 857-865.
    2. Panagariya, Arvind, 1982. "Tariff Policy under Monopoly in General Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 23(1), pages 143-156, February.
    3. Lorraine A. B. Eden, 1978. "Vertically Integrated Multinationals: A Microeconomic Analysis," Canadian Journal of Economics, Canadian Economics Association, vol. 11(3), pages 534-546, August.
    4. Katrak, Homi, 1979. "Multinational Monopolies and Commercial Policy: A Qualification and a Reply," Oxford Economic Papers, Oxford University Press, vol. 31(3), pages 508-511, November.
    5. Sanjaya Lall, 1980. "Transfer-Pricing by Multinational Manufacturing Firms," Palgrave Macmillan Books, in: The Multinational Corporation, chapter 5, pages 110-136, Palgrave Macmillan.
    6. Jack Hirshleifer, 1956. "On the Economics of Transfer Pricing," The Journal of Business, University of Chicago Press, vol. 29, pages 172-172.
    7. Itagaki, Takao, 1979. "Theory of the Multinational Firm: An Analysis of Effects of Government Policies," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 20(2), pages 437-448, June.
    8. Batra, Raveendra N & Hadar, Josef, 1979. "Theory of the Multinational Firm: Fixed versus Floating Exchange Rates," Oxford Economic Papers, Oxford University Press, vol. 31(2), pages 258-269, July.
    9. Horst, Thomas, 1971. "The Theory of the Multinational Firm: Optimal Behavior under Different Tariff and Tax Rates," Journal of Political Economy, University of Chicago Press, vol. 79(5), pages 1059-1072, Sept.-Oct.
    10. Lloyd A. Metzler, 1949. "Tariffs, the Terms of Trade, and the Distribution of National Income," Journal of Political Economy, University of Chicago Press, vol. 57(1), pages 1-1.
    11. L. W. Copithorne, 1971. "International Corporate Transfer Prices and Government Policy," Canadian Journal of Economics, Canadian Economics Association, vol. 4(3), pages 324-341, August.
    12. Finger, J. M., 1971. "Protection and domestic output," Journal of International Economics, Elsevier, vol. 1(3), pages 345-351, August.
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    Citations

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    Cited by:

    1. Konrad, Kai A. & Erik Lommerud, Kjell, 2001. "Foreign direct investment, intra-firm trade and ownership structure," European Economic Review, Elsevier, vol. 45(3), pages 475-494, March.
    2. Alfons Weichenrieder, 2009. "Profit shifting in the EU: evidence from Germany," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 16(3), pages 281-297, June.
    3. Schindler, Dirk & Schjelderup, Guttorm, 2012. "Debt shifting and ownership structure," European Economic Review, Elsevier, vol. 56(4), pages 635-647.
    4. 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.
    5. Kant, Chander, 1989. "Perverse Intra-Firm Trade," MPRA Paper 90776, University Library of Munich, Germany.
    6. 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.
    7. Tran Quoc H. & Croson Rachel T. A. & Seldon Barry J., 2016. "Experimental Evidence on Transfer Pricing," International Journal of Management and Economics, Warsaw School of Economics, Collegium of World Economy, vol. 50(1), pages 27-48, June.
    8. Guttorm Schjelderup, 1999. "Multinationals, Intra-Firm Trade and the Taxation of Foreign-Source Income," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 6(1), pages 93-105.
    9. Schindler, Dirk & Schjelderup, Guttorm, 2008. "Multinationals, Minority Ownership and Tax-Efficient Financing Structures," Discussion Papers 2008/19, Norwegian School of Economics, Department of Business and Management Science.

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    More about this item

    Keywords

    Less than wholly owned subsidiary; high transfer price;

    JEL classification:

    • F2 - International Economics - - International Factor Movements and International Business
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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