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http://hdl.handle.net/10419/27188
  
Title:Duopolistic competition, taxes, and the arm's-length principle PDF Logo
Authors:Korn, Evelyn
Lengsfeld, Stephan
Issue Date:2007
Series/Report no.:Discussion papers // School of Economics and Management of the Hanover Leibniz University 378
Abstract:Numerous (high-tax) countries presume that multinational firms use their transferpricing policies to shift profits into countries with lower tax rates. To avoid the corresponding loss in tax revenues, tax authorities develop constantly tightening rules to curb transfer-price distortions. Affected firms include the decision of compliance to these rules into their strategic considerations. In a scenario with arm'slength regulation in two countries, we analyze the transfer-pricing policy of a firm that uses the same transfer price for tax and managerial incentive purposes. Thus, the transfer-pricing policy is driven by three issues: interaction with competitors, minimization of tax burden, and avoidance of punishments. The model shows that tighter transfer-pricing rules may help firms to mitigate competition and to increase their profits and that non-compliance to the arm's-length principle is part of their equilibrium strategy.
JEL:H25
L22
M40
Document Type:Working Paper
Appears in Collections:Diskussionspapiere, Wirtschaftswissenschaftliche Fakultät, Universität Hannover

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