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Department of Economics, Copenhagen Business School Working Paper Series, Department of Economics, Copenhagen Business School

No 18-2000:
FORMULA APPORTIONMENT AND TRANSFER PRICING UNDER OLIGOPOLISTIC COMPETITION

Søren Bo Nielsen, Pascalis Raimondos-Møller and Guttorm Schjederup

Abstract: 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 multination 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.

Keywords: Formula apportionment; Transfer pricing; Oligopolistic competition; (follow links to similar papers)

JEL-Codes: D43; (follow links to similar papers)

21 pages, October 1, 2000

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