TY - JOUR
T1 - Production location of multinational firms under transfer pricing
T2 - the impact of the arm’s length principle
AU - Kato, Hayato
AU - Okoshi, Hirofumi
N1 - Funding Information:
Acknowledgements We wish to acknowledge the valuable comments from two anonymous referees. Thanks are also due to David Agrawal, Jay Pil Choi, Dave Donaldson, Taiji Furusawa, Makoto Hasegawa, Andreas Haufler, Jota Ishikawa, Michael Keen, Kozo Kiyota, Yoshimasa Komoriya, Christopher Ludwig, Yasusada Murata, Ben Lockwood, Yukihiro Nishimura, Hikaru Ogawa, Toshihiro Okubo, Pascalis Raimon-dos, Yasuhiro Sato, Nicolas Schmitt, Yoichi Sugita, Kimiko Terai, Eiichi Tomiura, and Lorenzo Trimarchi for helpful suggestions. This paper was presented at HITS-MJT (Kanazawa Seiryo U), Hitotsubashi-Sogang Trade Workshop (Hitotsubashi U), Public Economics Workshop (U of Tokyo), Study Group on Spatial Economics (Kyushu Sangyo U), JSIE Kanto Meeting (Nihon U), International Symposium of Urban Economics and Public Economics (Osaka U), Applied Economics Workshop (Keio U), Australasian Trade Workshop (U of Auckland), 17th GEP/CEPR Annual Postgraduate Conference (U of Nottingham), Public Economics Seminar (LMU), and International Institute of Public Finance (U of Tampere). Financial support from the Japan Society for the Promotion of Science (Grant Number: JP16J01228), the MEXT-Supported Program for the Strategic Research Foundation at Private Universities (Grant Number: JPS1391003), the Obayashi Foundation, the Japan Legislatic Society Foundation, and the German Research Foundation through GRK are gratefully acknowledged. All remaining errors are our responsibility.
Funding Information:
We wish to acknowledge the valuable comments from two anonymous referees. Thanks are also due to David Agrawal, Jay Pil Choi, Dave Donaldson, Taiji Furusawa, Makoto Hasegawa, Andreas Haufler, Jota Ishikawa, Michael Keen, Kozo Kiyota, Yoshimasa Komoriya, Christopher Ludwig, Yasusada Murata, Ben Lockwood, Yukihiro Nishimura, Hikaru Ogawa, Toshihiro Okubo, Pascalis Raimondos, Yasuhiro Sato, Nicolas Schmitt, Yoichi Sugita, Kimiko Terai, Eiichi Tomiura, and Lorenzo Trimarchi for helpful suggestions. This paper was presented at HITS-MJT (Kanazawa Seiryo U), Hitotsubashi-Sogang Trade Workshop (Hitotsubashi U), Public Economics Workshop (U of Tokyo), Study Group on Spatial Economics (Kyushu Sangyo U), JSIE Kanto Meeting (Nihon U), International Symposium of Urban Economics and Public Economics (Osaka U), Applied Economics Workshop (Keio U), Australasian Trade Workshop (U of Auckland), 17th GEP/CEPR Annual Postgraduate Conference (U of Nottingham), Public Economics Seminar (LMU), and International Institute of Public Finance (U of Tampere). Financial support from the Japan Society for the Promotion of Science (Grant Number: JP16J01228), the MEXT-Supported Program for the Strategic Research Foundation at Private Universities (Grant Number: JPS1391003), the Obayashi Foundation, the Japan Legislatic Society Foundation, and the German Research Foundation through GRK are gratefully acknowledged. All remaining errors are our responsibility.
Publisher Copyright:
© 2018, Springer Science+Business Media, LLC, part of Springer Nature.
PY - 2019/8/15
Y1 - 2019/8/15
N2 - 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 the price 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.
AB - 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 the price 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.
KW - Arm’s length principle (ALP)
KW - Intra-firm trade
KW - Multinational enterprises (MNEs)
KW - Production location choice
KW - Transfer pricing
UR - http://www.scopus.com/inward/record.url?scp=85056330640&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=85056330640&partnerID=8YFLogxK
U2 - 10.1007/s10797-018-9523-2
DO - 10.1007/s10797-018-9523-2
M3 - Article
AN - SCOPUS:85056330640
SN - 0927-5940
VL - 26
SP - 835
EP - 871
JO - International Tax and Public Finance
JF - International Tax and Public Finance
IS - 4
ER -