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Transfer pricing and enforcement policy in oligopolistic markets

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  • AMERIGHI, Oscar
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.

Suggested Citation

  • AMERIGHI, Oscar, 2004. "Transfer pricing and enforcement policy in oligopolistic markets," LIDAM Discussion Papers CORE 2004069, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvco:2004069
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    Cited by:

    1. Alex Augusto Timm Rathke, 2015. "Transfer pricing manipulation, tax penalty cost and the impact of foreign profit taxation," Papers 1508.03853, arXiv.org.
    2. Oscar Amerighi & Giuseppe De Feo, 2014. "Competition for FDI and Profit Shifting: On the Effects of Subsidies and Tax Breaks," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 70(3), pages 374-404, September.
    3. Amerighi, Oscar & Peralta, Susana, 2010. "The proximity-concentration trade-off with profit shifting," Journal of Urban Economics, Elsevier, vol. 68(1), pages 90-101, July.
    4. Tomáš Buus & Jaroslav Brada, 2010. "Can Profit-shifting be Resolved by Penalization?," European Financial and Accounting Journal, Prague University of Economics and Business, vol. 2010(3), pages 56-74.
    5. Alex Augusto Timm Rathke, 2015. "Note on tax enforcement and transfer pricing manipulation," Papers 1506.08743, arXiv.org.
    6. Gerlinde Verbist & Francesco Figari, 2014. "The Redistributive Effect and Progressivity of Taxes Revisited: An International Comparison across the European Union," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 70(3), pages 405-429, September.
    7. Rathke, Alex, 2015. "Transfer pricing manipulation, tax penalty cost and the impact of foreign profit taxation," MPRA Paper 66133, University Library of Munich, Germany.
    8. Rathke, Alex Augusto Timm, 2015. "Note on tax enforcement and transfer pricing manipulation," MPRA Paper 65337, University Library of Munich, Germany.
    9. Rathke, Alex A. T., 2015. "Transfer pricing manipulation, tax penalty cost and the impact of foreign profit taxation," EconStor Conference Papers 129075, ZBW - Leibniz Information Centre for Economics.

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    More about this item

    Keywords

    multinational enterprises; transfer pricing; tax competition; enforcement policy; economic integration;
    All these keywords.

    JEL classification:

    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F15 - International Economics - - Trade - - - Economic Integration
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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