Formula Apportionment and Transfer Pricing Under Oligopolistic Competition
21 Pages Posted: 21 Jul 2001
Date Written: May 2001
This paper demonstrates that under conditions of imperfect (oligopolistic) competition, a transition from separate accounting (SA) to formula apportionment (FA) does not eliminate the problem of profit shifting via transfer pricing. In particular, if affiliates of a multinational firm face oligopolistic competition, it is beneficial for the multinational to manipulate transfer prices for tax-saving as well as strategic reasons under both FA and SA. The analysis shows that a switch from SA rules to FA rules may actually strengthen profit shifting activities by multinationals.
JEL Classification: H21
Suggested Citation: Suggested Citation