Foreign Subsidiary, Transfer Pricing and Tariffs

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Abstract
In the transfer pricing literature, Horst [12] concludes that the multinational firm (MNF) will generally charge a "low" transfer price (LTP) while other authors are ambivalent on this question. This paper shows that less than whole ownership over the subsidiary generally makes the MNF change its transfer pricing strategy: from desiring a LTP to wanting a high transfer price (HTP). The conditions for an HTP are fairly broad so that we are more likely to observe it than has been suggested in the literature. The MNF literature also presumes that the host country loses revenue due to an HTP. However, this view ignores the effects of tariffs on a government's revenue. If tariff revenue is included an HTP can increase the host country's revenue.
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