The manipulation of transfer prices changes the relative tax burdens multin
ational firms face in their different countries of operation. Transfer pric
e manipulation also triggers changes in the tariffs that are levied on intr
a-company imports. For this reason, when tax rates change, as they did for
many countries during the 1980s, the incentive to manipulate transfer price
s varies substantially across products. I use product-level variation in ta
riff duties to identify transfer pricing changes in products imported to th
e U.S. The empirical results indicate that variations in the reported custo
ms values of U.S. imports from Canada, France, Germany, Japan, and the U.K.
were consistent with the transfer pricing incentives created by taxes and
tariffs.