Fuzzy Profit Shifting: A Model for Optimal Tax-induced Transfer Pricing with Fuzzy Arm's Length Parameter

This paper proposes a model of optimal tax-induced transfer pricing with a fuzzy arm's length parameter. Fuzzy numbers provide a suitable structure for modelling the ambiguity that is intrinsic to the arm's length parameter. For the usual conditions regarding the anti-shifting mechanisms,...

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Bibliographic Details
Published inarXiv.org
Main Author Rathke, Alex A T
Format Paper Journal Article
LanguageEnglish
Published Ithaca Cornell University Library, arXiv.org 12.01.2019
Subjects
Arms length transactions
Mathematical models
Maximization
Optimization
Parameters
Pricing
Quantitative Finance - Economics
Transfer pricing
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Summary:This paper proposes a model of optimal tax-induced transfer pricing with a fuzzy arm's length parameter. Fuzzy numbers provide a suitable structure for modelling the ambiguity that is intrinsic to the arm's length parameter. For the usual conditions regarding the anti-shifting mechanisms, the optimal transfer price becomes a maximising \(\alpha\)-cut of the fuzzy arm's length parameter. Nonetheless, we show that it is profitable for firms to choose any maximising transfer price if the probability of tax audit is sufficiently low, even if the chosen price is considered a completely non-arm's length price by tax authorities. In this case, we derive the necessary and sufficient conditions to prevent this extreme shifting strategy
ISSN:2331-8422
DOI:10.48550/arxiv.1901.03843