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

Diego Moreno () and Ana Belén Lemus Torres

UC3M Working papers. Economics from Universidad Carlos III de Madrid. Departamento de Economía

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.

Keywords: Vertical; Separation; Imperfect; Competition; Arm'S; Length; Principle; Transfer; Pricing; Regulation (search for similar items in EconPapers)
JEL-codes: H26 L51 L13 (search for similar items in EconPapers)
Date: 2019-07
New Economics Papers: this item is included in nep-com, nep-ind, nep-law, nep-ore and nep-reg
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Related works:
Working Paper: The non-neutrality of the arm's length principle with imperfect competition (2011) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:cte:werepe:28640

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