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Duopolistic Competition, Taxes and the Arm's-Length Principle

Evelyn Korn

University of Marburg - School of Business & Economics

Stephan Lengsfeld

University of Freiburg

December 20, 2005

Numerous (high-tax) countries presume that multinational firms use their transfer-pricing policies to shift profits into countries with lower tax rates. To avoid the corresponding loss in tax revenues, tax authorities develop constantly tightening rules which limit the scope of transfer-price distortions. Affected firms include the decision of compliance to these rules into their strategic considerations. Within a game-theoretic model we show that firms' transfer-pricing policies are driven by three issues: interaction with competitors, minimization of tax burden, and avoidance of punishments. It shows that tighter transfer-pricing rules may help firms to defuse competition and to increase their profits and that non-compliance to the arm's length principle is part of their equilibrium strategy.

Number of Pages in PDF File: 22

Keywords: transfer pricing, arm's-length principle, taxes, regulation, duopolistic competition

JEL Classification: H25, L22, M40, M43, M46, M47

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Date posted: December 22, 2005  

Suggested Citation

Korn, Evelyn and Lengsfeld, Stephan, Duopolistic Competition, Taxes and the Arm's-Length Principle (December 20, 2005). Available at SSRN: https://ssrn.com/abstract=871219 or http://dx.doi.org/10.2139/ssrn.871219

Contact Information

Evelyn Korn
University of Marburg - School of Business & Economics ( email )
Universitätsstr. 24
D-35037 Marburg
++49 6421 2823902 (Phone)
++49 6421 2828944 (Fax)
HOME PAGE: http://www.uni-marburg.de/fb02/mikro
Stephan Lengsfeld (Contact Author)
University of Freiburg
Bertoldstr. 17, Alte Uni
Freiburg i. Br., D-79085
Feedback to SSRN

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