Relationship-Specific Investments and the Transfer Pricing Paradox

Relationship-Specific Investments and the Transfer Pricing Paradox The revised Treasury Regulations interpreting Internal Revenue Code Section 482 allow the use of profit-based transfer pricing methods, as well as the older methods based on prices from comparable transactions between independent parties. This paper compares the effects of price-based and profit-based transfer pricing methods on the allocation of taxable income in a model in which organization structure affects the level of relationship-specific investments made by vertically integrated groups and comparable independent firms. Analysis of the model shows that the price-based methods systematically allocates more taxable income to foreign subsidiaries and less to domestic parents than does the profit-based method. Review of Accounting Studies Springer Journals

Relationship-Specific Investments and the Transfer Pricing Paradox

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Kluwer Academic Publishers
Copyright © 1999 by Kluwer Academic Publishers
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance
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