Transfer Pricing by strongUstrong.S.-Based Multinational Firms.pdfVIP

Transfer Pricing by U.S.-Based Multinational Firms∗ Andrew B. Bernard† Tuck School of Business at Dartmouth NBER J. Bradford Jensen‡ Institute for International Economics Peter K. Schott§ Yale School of Management NBER August, 2006 Abstract This paper examines how prices set by multinational firms vary across arm’s-length and related- party customers. Comparing prices within firms, products, destination countries, modes of transport and month, we find that the prices U.S. exporters set for their arm’s-length customers are substantially larger than the prices recorded for related-parties. This price wedge is smaller for commodities than for differentiated goods, is increasing in firm size and firm export share, and is greater for goods sent to countries with lower corporate tax rates and higher tariffs. We also find that changes in exchange rates have differential effects on arm’s-length and related-party prices; an appreciation of the dollar reduces the difference between the prices. Keywords: Related party trade,Corporate taxes, Intrafirm trade, Arm’s-length sales, Tariffs, Market structure, Pricing-to- market JEL classifi cation: F23, F14, H25, H26, H32 ∗The authors would like to thank Gary Hufbauer and Richard Sansing for helpful comments as well as seminar participants at IIE, FIEF, NBER, Princeton, Toronto, Wisconsin and Yale. Special thanks to Jim Davis for timely help when it counted and to Evan Gill for research assistance. Bernard and Schott (SES-0241474) and Jensen (SES-0552029) thank the Nation