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
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: Suggested Citation