draining development.pdf - Khazar University

Transfer Price Manipulation 221all-else-being-equal variables, that is, the controls used to ensure comparabilitybetween the controlled and uncontrolled transactions. As westress above, to measure TPM, one must know what the arm’s-lengthprice is for comparison purposes, which requires close comparables.U.S. import data from the U.S. Census Bureau have also been used bySwenson (2001) at the product level by country to test for evidence ofTPM over 1981–86. Swenson constructs prices by dividing reported customsvalues by reported quantities. She finds that a 5 percent fall in foreignCIT rates caused a tiny rise in U.S. import prices. However, she isunable to separate intrafirm from arm’s-length trade; so, her study suffersfrom the same problem as the Pak and Zdanowicz studies.Recently, Bernard, Jensen, and Schott (2008) used U.S. export transactionsbetween 1993 and 2000 to examine the wedge between arm’s-lengthand related-party transactions and determine how the wedge varies withproduct and firm characteristics, market structure, and government policy.Their data set is compiled from U.S. export data and U.S. establishmentdata from the U.S. Census Bureau, as well as U.S. Customs Bureaudata. Because they use census data, their results also suffer from unreliablecoding for related-party transactions. The price wedge is measuredas the difference between the log of the averaged arm’s-length prices andthe log of the related-party prices at the firm-product-country level. Theauthors find that export prices for arm’s-length transactions are, on average,43 percent higher, all else being equal, than prices for intrafirmexports. The wedge varies by type of good and is smaller for commodities(8.8 percent, on average) than for differentiated goods (66.7 percent, onaverage). The wedge is larger for goods shipped by larger firms withhigher export shares and in product-country markets served by fewerexporters. The wedge is negatively associated with the foreign country’sCIT rate and positively related to that country’s import tariff. A 1 percentdrop in the foreign tax rate increases the price wedge by about 0.6 percent.Lastly, they find that a 10 percent appreciation of the U.S. dollaragainst the foreign currency reduces the wedge by 2 percent.In two situations, however, the quality of the intrafirm trade markershould be quite high, as follows: (1) if government agencies keep data onspecific products that are of high salience or (2) if the government isconcerned about related-party transactions. In these cases, more thannormal attention is paid to data quality and therefore to whether the