Transfer Pricing as Tax-induced Dumping: The Arm’s Length Principle and Antidumping

Abstract

When multinational firms export their products from a high-tax to a low-tax country, they have incentives to set lower internal prices to avoid high taxes. However, such low transfer prices may be regarded as dumping and the low-tax country can implement antidumping measures. This study theoretically addresses whether a tightening of transfer-price regulation induces antidumping protection, and demonstrates that possible antidumping measures complicate the welfare effects of regulating transfer pricing. Starting from low enforcement of the transfer-price regulation, a tightening of it triggers the antidumping protection and improves the welfare of the high-taxed country. However, given that the antidumping protection is in place, a further tightening of the transfer-price regulation may worsen the high-taxed country’s welfare. If the enforcement of the regulation becomes large enough, multinational firms no longer engage in dumping.