Distortions Caused by the use of Arm's-Length Transfer Prices.

Key Points

• The study aims to explore the effects of arm's-length transfer pricing on income allocation within multinational enterprises, particularly using the CUP method.
• Analyzed the impact of the Comparable Uncontrolled Price method on income allocation for tax purposes.
• Utilized a model to simulate income distribution between manufacturing and selling entities.
• Reviewed existing literature to highlight previous findings on income reporting anomalies.
• The CUP method allocates disproportionately high levels of income to manufacturing entities, as shown in the model.
• Foreign MNEs' U.S. subsidiaries often report zero or near-zero taxable income, confirming earlier anomalies.
• The method distorts production and organizational decisions based on differing tax rates between countries.