  This paper analizes the optimal level of transfer pricing manipulation when
the expected tax penalty is a function of the tax enforcement and the market
price parameter. The arm's length principle implies the existence of a range of
acceptable prices shaped by market, and firms can manipulate transfer prices
more freely if market price range is wide, or if its delimitations are
difficult to determine. Home taxation of foreign profits can reduce income
shifting incentive, depending on the portion of repatriation for tax purposes.
We find that the limited tax credit rule tends to be a less efficient measure,
nonetheless it is the most widely adopted rule by countries, so to spark the
perspective of more powerful approaches for taxation of foreign profits.
