The Impact of Transfer Pricing on Intrafirm Trade

Abstract

Multinational corporations (MNCs) play a very large role in international trade. Not only is there a substantial amount of arm's-length trade between MNCs and unaffiliated buyers, but trade within MNCs is also quite considerable. For instance, in 1994, this intrafirm trade accounted for approximately 36 percent of exports and 43 percent of imports in the United States. These fractions vary somewhat from year to year, but intrafirm trade has been a similarly large share of international trade since 1977. Recently, researchers have devoted some attention to examining how intrafirm trade may be different from arm's-length trade. One essential reason intrafirm trade may differ from non-intrafirm trade results from the fact that MNCs may alter their transactions in order to minimize worldwide tax burdens. This chapter discusses the impact of transfer pricing on intrafirm trade. Using data on the operations of U.S. parent companies and their foreign affiliates, it examines the relationship between the tax minimization strategies of MNCs and intrafirm trade. The results indicate that taxes have a substantial influence on intrafirm trade flows.

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