Formula Apportionment and Transfer Pricing Under Oligopolistic Competition

Nielsen, Soren Bo; Raimondos, Pascalis; Schjelderup, Guttorm

doi:10.2139/ssrn.274305

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Formula Apportionment and Transfer Pricing Under Oligopolistic Competition

21 Pages Posted: 21 Jul 2001

See all articles by Soren Bo Nielsen

Soren Bo Nielsen

Copenhagen Business School - Department of Economics; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Queensland University of Technology - School of Economics and Finance; Copenhagen Business School - Department of Economics; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Guttorm Schjelderup

NHH Norwegian School of Economics - Department of Business and Management Science

Date Written: May 2001

Abstract

This paper demonstrates that under conditions of imperfect (oligopolistic) competition, a transition from separate accounting (SA) to formula apportionment (FA) does not eliminate the problem of profit shifting via transfer pricing. In particular, if affiliates of a multinational firm face oligopolistic competition, it is beneficial for the multinational to manipulate transfer prices for tax-saving as well as strategic reasons under both FA and SA. The analysis shows that a switch from SA rules to FA rules may actually strengthen profit shifting activities by multinationals.

JEL Classification: H21

Suggested Citation: Suggested Citation

Nielsen, Soren Bo and Raimondos, Pascalis and Schjelderup, Guttorm, Formula Apportionment and Transfer Pricing Under Oligopolistic Competition (May 2001). Available at SSRN: https://ssrn.com/abstract=274305 or http://dx.doi.org/10.2139/ssrn.274305