Transfer pricing rules, OECD guidelines, and market distortions

Kristian Behrens (), Susana Peralta () and Pierre Picard

DEM Discussion Paper Series from Department of Economics at the University of Luxembourg

Abstract: We study the impact of transfer pricing rules on sales prices, firms' organizational structure, and consumers' utility within a two-country monopolistic competition model featuring source-based profit taxes that differ across countries. Firms can either become multinationals, i.e., they serve the foreign market through a fully controlled a¢ liate; or they can become exporters, i.e., they serve the foreign market by contracting with an independent distributor. Compared to the benchmark cases, where tax authorities are either unable to audit firms or where they are able to audit them perfectly, the use of the OECD's Comparable Uncontrolled Price (CUP) or Cost-Plus (CP) rule distorts firms' output and pricing decisions. The reason is that the comparable arm's length transactions between exporters and distributors, which serve as benchmarks, are not efficient. We show that implementing the CUP or CP rules is detrimental to consumers in the low tax country, yet benefits consumers in the high tax country.

Keywords: transfer pricing; OECD guidelines; multinationals and exporters; organizational choice; arm's length principle (search for similar items in EconPapers)
JEL-codes: F12 H25 H26 H87 L14 (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-int and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Transfer Pricing Rules, OECD Guidelines, and Market Distortions (2014)
Working Paper: Transfer pricing rules, OECD guidelines, and market distortions (2014)
Working Paper: Transfer pricing rules, OECD guidelines, and market distortions (2009)
Working Paper: Transfer Pricing Rules, OECD Guidelines, and Market Distortions (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:luc:wpaper:10-20

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