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

Ana Belén Lemus Torres and Diego Moreno ()

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 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.

Keywords: Transfer; pricing; regulation; Arm´s; Length; Principle; Imperfect; competition; Vertical; separation (search for similar items in EconPapers)
Date: 2011-11
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