Transfer pricing under global adoption of destination-based cash-flow taxation

The idea that the problem of transfer price manipulation vanishes under global adoption of destination-based cash-flow taxation (DBCFT) is based on how firms behave in perfectly competitive or monopolistic markets. We show that the neutralizing effect DBCFT has on transfer price incentives can fail once multinational firms are multi-market oligopolists. Under imperfect competition, a multinational will delegate output decisions to its affiliates so that its transfer price can have a strategic role through its influence on competitors’ actions. Even if all countries adopt DBCFT, transfer prices will not equal arm’s length prices, and they will vary with changes in corporate tax rates.