Production location of multinational firms under transfer pricing: the impact of the arm’s length principle

Hayato Kato, Hirofumi Okoshi

Research output: Contribution to journalArticlepeer-review

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 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.

Original languageEnglish
Pages (from-to)835-871
Number of pages37
JournalInternational Tax and Public Finance
Volume26
Issue number4
DOIs
Publication statusPublished - Aug 15 2019
Externally publishedYes

Keywords

  • Arm’s length principle (ALP)
  • Intra-firm trade
  • Multinational enterprises (MNEs)
  • Production location choice
  • Transfer pricing

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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