Trade, multinationals, and transfer pricing regulations

Recent years have seen the introduction of profit comparisons by national t ax authorities to cope with multinationals' profit shifting activities. We argue that a country that switches from price-related transfer pricing rule s to profit-related measures can reduce imports without changing firms' tra nsfer prices. The trade effect makes the change of transfer pricing rules a potential instrument of protectionism and strategic trade policy. JEL clas sification: F23, H87.