Optimal Transfer Pricing for the Multinational Firm

1972 ◽  
Vol 1 (3) ◽  
pp. 74 ◽  
Author(s):  
J. William Petty II ◽  
Ernest W. Walker
Keyword(s):  
Transfer Pricing ◽  
Multinational Firm ◽  
Optimal Transfer

scholarly journals Substitution across profit shifting methods and the impact on thin capitalization rules

2021 ◽  
Author(s):  
Gideon Goerdt ◽  
Wolfgang Eggert
Keyword(s):  
Multinational Firms ◽  
Transfer Pricing ◽  
Multinational Firm ◽  
Profit Shifting ◽  
Goods And Services ◽  
Internal Goods ◽  
Transfer Prices ◽  
Debt Shifting ◽  
The Impact ◽  
Thin Capitalization

AbstractThin capitalization rules limit firms’ ability to deduct internal interest payments from taxable income, thereby restricting debt shifting activities of multinational firms. Since multinational firms can limit their tax liability in several ways, regulation of debt shifting may have an impact on other profit shifting methods. We therefore provide a model in which a multinational firm can shift profits out of a host country by issuing internal debt from an entity located in a tax haven and by manipulating transfer prices on internal goods and services. The focus of this paper is the analysis of regulatory incentives, $$(i)$$ ( i ) if a multinational firm treats debt shifting and transfer pricing as substitutes or $$(ii)$$ ( i i ) if the methods are not directly connected. The results provide a new aspect for why hybrid thin capitalization rules are used. Our discussion in this paper explains why hybrid rules can result in improvements in welfare if multinational firms treat methods of profit shifting as substitutes.

scholarly journals Gray Markets and Multinational Transfer Pricing

2011 ◽  
Vol 87 (2) ◽  
pp. 393-421 ◽  
Author(s):  
Romana L. Autrey ◽  
Francesco Bova
Keyword(s):  
Social Welfare ◽  
Marginal Cost ◽  
Transfer Pricing ◽  
Foreign Market ◽  
Multinational Firm ◽  
Foreign Subsidiary ◽  
Foreign Subsidiaries ◽  
Gray Market ◽  
Pricing Rules ◽  
Transfer Prices

ABSTRACT Gray markets arise when a manufacturer's products are sold outside of its authorized channels, for instance when goods designated by a multinational firm for sale in a foreign market are resold domestically. One method multinationals use to combat gray markets is to increase transfer prices to foreign subsidiaries in order to increase the gray market's cost base. We illustrate that, when a gray market competitor exists, the optimal transfer price to a foreign subsidiary exceeds marginal cost and is decreasing in the competitiveness of the domestic market. However, a multinational's discretion in setting transfer prices may be limited by mandatory arm's length transfer pricing rules. Provided gray markets exist, we characterize when mandating arm's length transfer pricing lowers domestic social welfare relative to unrestricted transfer pricing. We also demonstrate that gray markets can lead to higher domestic tax revenues, even when gray market firms do not pay taxes domestically.

scholarly journals Experimental Evidence on Transfer Pricing

2016 ◽  
Vol 50 (1) ◽  
pp. 27-48 ◽  
Author(s):  
Quoc H. Tran ◽  
Rachel T. A. Croson ◽  
Barry J. Seldon
Keyword(s):  
Transfer Pricing ◽  
Tax Rates ◽  
Optimal Transfer ◽  
Policy Interventions ◽  
Economics Experiments ◽  
Theoretical Predictions ◽  
Transfer Prices ◽  
Partial Ownership ◽  
Tariff Rates ◽  
The Impact

Abstract We use incentivized economics experiments to test both the point predictions and comparative static predictions of optimal transfer pricing models, comparing behavior under varying conditions, including wholly versus partially-owned subsidiaries and different tariff and tax rates. As predicted, we find that transfer prices are responsive to relative tax and tariff rates as well as ownership proportions. Additionally, we examine convergence and learning in this setting. While individuals do not choose optimal transfer prices, their choices converge to optimal levels with experience. This paper thus makes two important contributions. First, by comparing behavior with theoretical predictions it provides evidence of whether (and when) individuals set transfer prices optimally. Second, by comparing behavior under conditions of full and partial ownership it provides evidence on the impact of policy interventions (like regulating ownership proportions by MNEs) on tax revenues.

scholarly journals Transfer Pricing In Transnational Operations: A Case- And Literature-Based Analysis

2011 ◽  
Vol 2 (8) ◽  
Author(s):  
Virginia A. Taylor ◽  
E.J. (Roy) Knaus ◽  
William E. Matthews
Keyword(s):  
Marketing Strategy ◽  
Transfer Pricing ◽  
International Management ◽  
Management Team ◽  
Multinational Firm ◽  
Academic Environments ◽  
Organizational Perspective ◽  
Cost Allocations ◽  
The Difference ◽  
Competitive Marketing Strategy

This paper represents a combined case- and literature-based analysis of transnational pricing and highlights the difference in the issues and perspectives of the business and academic environments. Following an introduction to the issue (noting the growing importance of the transfer of goods from one organizational entity to another within a multinational firm), a short case - The Henderson Company - illustrates how a relatively simple announcement can lead to a lengthy and heated discussion that points out the differences in opinion both between the headquarters and the subsidiaries and between the various regional entities themselves. The analysis of the case reflecting the concerns and perspectives of the members of the international management team (in terms of involvement and partnership, legal and operational concerns, competitive marketing strategy, and evaluation, compensation, and motivational issues) is followed by a literature-based analysis that looks at the complexities of the situation in terms of management, economics, taxation, and finance research. The paper concludes with the recognition that the issue of transnational pricing is a complex one that needs to be addressed from both an organizational perspective and from an international viewpoint emphasizing the development of ways of more accurately reflecting cost allocations.

scholarly journals Transfer Pricing: Conceptual Thoughts on the Nature of the Multinational Firm

2006 ◽  
Vol 31 (2) ◽  
pp. 29-44 ◽  
Author(s):  
Markus Brem ◽  
Thomas Tucha
Keyword(s):  
Value Chain ◽  
Multinational Enterprises ◽  
Multinational Firms ◽  
Transaction Cost Economics ◽  
Transfer Pricing ◽  
Multinational Firm ◽  
Value Chains ◽  
Chain Model ◽  
Business World ◽  
Clear Cut

This paper deploys Transaction Cost Economics (TCE) to elaborate on the shortcomings of ‘mainstream‘ transfer pricing in multinational firms. Departing from the notion that multinationals increasingly (re-)organize their business along multinational value chains irrespective of jurisdictional borders, this paper discusses the nature of the multinational firm and the problem of choosing the right intra-group (transfer) price. The mainstream transfer pricing approach derived from the Arm�s Length Principle (ALP) is deemed inappropriate for globally operating multinational enterprises (MNEs). Referring to the value chain model, the paper suggests that ‘entrepreneurial coordination’ is the key performance feature to be used for valuing business activity and for allocating — for tax transfer pricing purposes — standard mark-ups and residual profits along the value chain. The main findings of this paper are: Neo-classical concepts on marginal pricing may not suffice to establish arm's lengh transfer pricing; the inadequacy between tax-world transfer pricing (getting income allocation right) and business-world transfer pricing (getting management incentives right) might find its explanation in such concepts. MNEs need to be understood as large organizations different from domestic large organizations by the fact that they operate in different jurisdictions and/or institutional environments. Operative business is coordinated along business lines in which value chain processes can e identified. De facto, business-world transfer pricing takes place along such value chains in which tangible and intangible assets are transferred and hence require appropriate pricing from both the tax-world and the business-world perspective. TCE is a worthy candidate for illustrating governance structures and transactional attributes of business between related parties of a multinational group; such features support arguments to establish arm's length transfer pricing. Regularly, a clear cut-off of functional allocation into tax jurisdictions is difficult to achieve because of the high degree of integration into the value chains of the multinational. TCE appears to better distinguish between so-called �routine� and ‘non-routine’ functions. Transactions of the MNE are rarely of an ‘either-or’ feature (either ‘market’ or ‘hierarchy’). Depending upon transactional attributes, the price of such transaction can be assessed by variables describing the institutional and economic context, the transaction-specific contract, the stage of the business process involved, the strategy chosen, and the function pattern (function, risk, assets) Comparable information is rarely found in databases which provide company information. The more non-routine functions and intangibles are involved, the less is the tested function (or business unit) comparable with companies from external databases. Under these data constraints on comparables, the arm�s length tests on transfer pricing will have to resort to internal information if the ALP is intended to remain viable. A next-generation transfer pricing approach may have to make use of patterns of governance to characterize and to value the functional contributions to the overall value chain.

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