English, Article, Journal or magazine article edition: The Distorting Arm’s Length Principle Michael P. Devereux; Christian Keuschnigg

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Bookmark: http://trove.nla.gov.au/version/24503
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • The Distorting Arm’s Length Principle
Author
  • Michael P. Devereux
  • Christian Keuschnigg
Physical Description
  • preprint
Notes
  • To prevent profit shifting by manipulation of transfer prices, tax authorities typically apply the arm’s length principle in corporate taxation and use comparable market prices to ‘correctly’ assess the value of intracompany trade and royalty income of multinationals. We develop a model of heterogeneous firms subject to financing frictions and offshoring of intermediate inputs. We find that arm’s length prices systematically differ from independent party prices. Application of the principle thus distorts multinational activity by reducing debt capacity and investment of foreign affiliates, and by distorting organizational choice between direct investment and outsourcing. Although it raises tax revenue and welfare in the headquarter country, welfare losses are larger in the subsidiary location, leading to a first order loss in world welfare.
  • Corporate tax, transfer prices, arm’s length principle, outsourcing, foreign direct investment, corporate finance
  • RePEc:btx:wpaper:0910
Language
  • English
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