Transfer pricing and enforcement policy in oligopolistic markets

Oscar Amerighi ()

No 2004069, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: In this paper we set up a symmetric two-country model with trade costs and international ownership to study the transfer pricing decisions by two multinationals operating in markets with Cournot competition. We let governments choose both the corporate profit tax rate and the level of enforcement of the "arm's length" principle and we examine how enforcement policies affect the tax competition game. Furthermore, we analyze in what direction economic integration, in terms of a reduction in trade costs and/or a larger international ownership of multinationals, influences the symmetric equilibrium level of the two policy instruments. We show that increased economic integration may lead to higher equilibrium tax rates, and that, as governments increase the level of enforcement, equilibrium tax rates increase as well. Moreover, we find that, when the two MNEs are not fully owned by domestic residents, trade liberalization decreases the equilibrium enforcement policy, while increased international ownership increases the level of enforcement.

Keywords: multinational enterprises; transfer pricing; tax competition; enforcement policy; economic integration (search for similar items in EconPapers)
JEL-codes: F02 F15 F23 H87 (search for similar items in EconPapers)
Date: 2004-10
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Related works:
Working Paper: Transfer pricing and enforcement policy in oligopolistic markets (2009)
Working Paper: Transfer Pricing and Enforcement Policy in Oligopolistic Markets (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:cor:louvco:2004069

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