Production Location of Multinational Firms under Transfer Pricing: The Impact of the Arm's Length Principle

47 Pages Posted: 28 Apr 2017 Last revised: 27 Oct 2018

Date Written: October 26, 2018

Abstract

When multinational enterprises (MNEs) separate the geographical location of affiliates, they can shift profits between the affiliates by manipulating intra-firm prices of inputs. We show that if the international tax difference between the parent and the host countries is large, MNEs choose to separately locate their affiliates in the two countries. We also investigate the impact of the arm's length principle (ALP) on the location choice, which requires that the intra-firm price of inputs should be set equal to that of similar inputs for the independent downstream firms. The ALP may change the location choice of MNEs, bringing smaller tax revenues to the host country, but greater revenues globally.

Keywords: Transfer Pricing, Production Location Choice, Intra-Firm Trade, Arm's Length Principle

JEL Classification: F12, F23, H25, H26

Suggested Citation

Kato, Hayato and Okoshi, Hirofumi, Production Location of Multinational Firms under Transfer Pricing: The Impact of the Arm's Length Principle (October 26, 2018). Available at SSRN: https://ssrn.com/abstract=2959185 or http://dx.doi.org/10.2139/ssrn.2959185

Hayato Kato (Contact Author)

Osaka University ( email )

1-7 Machikaneyama
Toyonaka, Osaka 5600043
Japan

HOME PAGE: http://https://hayatokato.weebly.com/

Hirofumi Okoshi

Okayama University ( email )

1-1-1 Tsushimanaka, Kita Ward
Okayama, 700-0082
Japan
+81 86 251 7525 (Phone)

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