  This study analyses the tax-induced profit shifting behaviour of firms and
the impact of governments' anti-shifting rules. We derive a model of a firm
that combines internal sales and internal debt in a full profit shifting
strategy, and which is required to apply the arm's length principle and a
general thin capitalisation rule. We find several cases where the firm may
shift profits to low-tax countries while satisfying the usual arm's length
conditions in all countries. Internal sales and internal debt may be regarded
either as complementary or as substitute shifting channels, depending on how
the implicit concealment costs vary after changes in all transactions. We show
that the cross-effect between the shifting channels facilitates profit shifting
by means of accepted transfer prices and interest rates.
