The arm's length principle and distortions to multinational firm organization

• 成果类型: Article
• 署名作者: Keuschnigg, Christian; Devereux, Michael P.
• 署名单位: University of St Gallen; University of Oxford
• 刊物名称: JOURNAL OF INTERNATIONAL ECONOMICS
• ISSN/ISSBN: 0022-1996
• DOI: 10.1016/j.jinteco.2012.08.007
• 发表日期: 2013
• 页码: 432-440
• 关键词: corporate tax; Transfer prices; Arm's length principle; Corporate finance

摘要

To prevent profit shifting by manipulation of transfer prices, tax authorities typically apply the arm's length principle in corporate taxation and use comparable market prices to 'correctly' assess the value of intracompany trade and royalty income of multinationals. We develop a model of firms subject to financing frictions and offshoring of intermediate inputs. We find that arm's length prices systematically differ from prices set by independent agents. Application of the principle distorts multinational activity by reducing debt capacity and investment of foreign affiliates. Although it raises tax revenue and welfare in the headquarter country, welfare losses may be larger in the subsidiary location, leading to a loss in world welfare. (C) 2012 Elsevier B.V. All rights reserved.