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Strategic incentives for kepping one set of books under the Arm's Length Principle

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  • Lemus Torres, Ana Belén

Abstract

The OECD recommendation that transfer prices between parent firms and their subsidiaries be consistent with the Arm's Length Principle (ALP) for tax purposes does not restrict internal pricing policies. I show that under imperfect competition parents' accounting policies determine the properties of market outcomes: if parents keep one set of books (i.e., their internal transfer prices are consistent with the ALP), then competition in the external (home) market softens (intensifies) relative to the equilibrium where parents and subsidiaries are integrated. In contrast, if firms keep two sets of books (i.e., their internal transfer prices differ from those used for tax purposes) or maintain asymmetric accounting policies, then competition intensifies in both markets. Keeping one set of books is equilibrium in most of the parameter space.

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  • Lemus Torres, Ana Belén, 2011. "Strategic incentives for kepping one set of books under the Arm's Length Principle," UC3M Working papers. Economics we1135, Universidad Carlos III de Madrid. Departamento de Economía.
    • Handle: RePEc:cte:werepe:we1135
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    1. Lemus Torres, Ana Belén, 2011. "The non-neutrality of the arm's length principle with imperfect competition," UC3M Working papers. Economics we1134, Universidad Carlos III de Madrid. Departamento de Economía.

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