Abstract
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.
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Sansing, R. Relationship-Specific Investments and the Transfer Pricing Paradox. Review of Accounting Studies 4, 119–134 (1999). https://doi.org/10.1023/A:1009601102396
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DOI: https://doi.org/10.1023/A:1009601102396