Scandinavian Working Papers in Economics

Working Papers,
Copenhagen Business School, Department of Economics

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

Søren Bo Nielsen , Pascalis Raimondos-Møller and Guttorm Schjederup
Additional contact information
Søren Bo Nielsen: Department of Economics, Copenhagen Business School, Postal: Department of Economics, Copenhagen Business School, Solbjerg Plads 3 C, 5. sal, DK-2000 Frederiksberg, Denmark
Pascalis Raimondos-Møller: Department of Economics, Copenhagen Business School, Postal: Department of Economics, Copenhagen Business School, Solbjerg Plads 3 C, 5. sal, DK-2000 Frederiksberg, Denmark
Guttorm Schjederup: Norwegian School of Economics and Business Administration, Postal: Norwegian School of Economics and Business Administration, CESifo, Helleveien 30, N-5045 Bergen, Norway

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

JEL-codes: D43

21 pages, October 1, 2000

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