Multinational Transfer Pricing, Tax Arbitrage and the Arm's Length Principle

7 Pages Posted: 5 Jan 2008

See all articles by Chongwoo Choe

Chongwoo Choe

Monash University - Department of Economics

Charles E. Hyde

affiliation not provided to SSRN

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Abstract

This paper studies the multinational firm's choice of transfer prices when the firm uses separate transfer prices for tax and managerial incentive purposes, and when there is penalty for non-compliance with the arm's length principle. The optimal incentive transfer price is shown to be a weighted average of marginal cost and the optimal tax transfer price plus an adjustment by a fraction of the marginal penalty for non-arm's length pricing. Insofar as the tax rates are different in different jurisdictions, the firm optimally trades off the benefits of tax arbitrage against the penalty for non-arm's length pricing.

Suggested Citation

Choe, Chongwoo and Hyde, Charles E., Multinational Transfer Pricing, Tax Arbitrage and the Arm's Length Principle. Economic Record, Vol. 83, Issue 263, pp. 398-404, December 2007. Available at SSRN: https://ssrn.com/abstract=1080369 or http://dx.doi.org/10.1111/j.1475-4932.2007.00429.x

Chongwoo Choe (Contact Author)

Monash University - Department of Economics ( email )

Department of Economics
PO Box 197
Caulfield East, Victoria 3145
Australia
+61 2 9903 1125 (Phone)
+61 2 9903 1128 (Fax)

Charles E. Hyde

affiliation not provided to SSRN

No Address Available

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