Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/185501
Authors: 
Choi, Jay Pil
Furusawa, Taiji
Ishikawa, Jota
Year of Publication: 
2018
Series/Report no.: 
CESifo Working Paper No. 7303
Abstract: 
This paper analyzes incentives of a multinational enterprise to manipulate an internal transfer price to take advantage of corporate-tax differences across countries under both monopoly and oligopoly. We examine “cost plus” and “comparable uncontrollable price” as two alternative implementations of the so-called arm’s length principle (ALP) to mitigate this problem. Tax-induced foreign direct investment (FDI) may entail inefficient internal production. We show how the mechanisms behind such inefficient FDI differ between alternative implementation schemes of the ALP and explore implications of the ALP for welfare and dual sourcing incentives. We also develop a novel theory of vertical foreclosure as an equilibrium outcome of strategic transfer pricing.
Subjects: 
foreign direct investment
multinational enterprise
corporate tax
transfer pricing
arm’s length principle
vertical foreclosure
JEL: 
F12
F23
H26
L12
L13
L51
L52
Document Type: 
Working Paper

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