Transfer Pricing in Multinational Corporations: An Integrated Management- and Tax Perspective

  • Moritz Hiemann
  • Stefan Reichelstein
Chapter
Part of the MPI Studies in Tax Law and Public Finance book series (MPISTUD, volume 1)

Abstract

Transfer prices play a central role for both managerial accounting and tax reporting purposes in vertically integrated firms. Common to these purposes is that transfer prices ultimately determine the distribution of reported income across different segments (divisions) of the firm. The managerial accounting literature has long viewed transfer prices as an instrument for coordinating the production and sales decisions of different business segments. The tax-oriented literature on transfer pricing, in contrast, has largely viewed the transactions between business segments of the firm as given. The major focus in this literature has been on how a firm can minimize its worldwide tax liability within the confines of the arm’s-length standard. In this article, we take an integrated view of managerial and tax considerations by analyzing how the optimal internal transfer prices depends on the admissible arm’s length price and the applicable tax rates.

References

  1. Baldenius, T. (2008), Internal Pricing, Foundations and Trends in Accounting 3(4).Google Scholar
  2. Baldenius, T. (2006), Discussion of “Divisional Performance Measurement and Transfer Pricing for Intangible Assets”, Review of Accounting Studies 11, 367 – 376.CrossRefGoogle Scholar
  3. Baldenius, T., N. Bastian, and S. Reichelstein (2005), Market-Based Transfer Pricing: A Synthesis of Recent Studies, in: Internationalisierung des Controlling (J. Weber and M. Meyer, eds.), 113 – 128.Google Scholar
  4. Baldenius, T., N. Melumad, and S. Reichelstein (2004), Integrating Managerial and Tax Objectives in Transfer Pricing, Accounting Review 79(3), 591 – 615.CrossRefGoogle Scholar
  5. Baldenius, T. and S. Reichelstein (2006), External and Internal Pricing in Multidivisional Firms, Journal of Accounting Research 44(1), 1 – 28.CrossRefGoogle Scholar
  6. Bastian, N. and S. Reichelstein (2005), Transfer Pricing at Timken, Stanford Graduate School of Business, Case # A-190.Google Scholar
  7. Boos, M. (2003), International Transfer Pricing: The Valuation of intangible Assets, The Hague, NetherlandsGoogle Scholar
  8. Choe, C. and C. Hyde (2007), Multinational Transfer Pricing, Tax Arbitrage and the Arm’s Length Principle, The Economic Record 83 (263), 398 – 404.CrossRefGoogle Scholar
  9. Drucker, J. (2010), Google 2.4 % Rate Shows How $60 Billion Lost to Tax Loopholes, Bloomberg News, http://www.bloomberg.com.news/2010-10-21.
  10. Dutta, S. and S. Reichelstein (2010), Decentralized Capacity Management and Internal Pricing, Review of Accounting Studies 15, 442 – 478.CrossRefGoogle Scholar
  11. Eccles, R. and H. White (1988), Price and Authority in Inter-Profit Center Transactions, American Journal of Sociology 94 (Supplement), 17 – 51.Google Scholar
  12. Eden, L. (1998), Taxing Multinationals: Transfer Pricing and Corporate Income Taxation in North America, Toronto, Canada.Google Scholar
  13. Edlin, A., and S. Reichelstein (1995), Specific Investment Under Negotiated Transfer Pricing: An Efficiency Result, The Accounting Review 70(2), 275 – 291.Google Scholar
  14. Goex, R. and U. Schiller (2008), An Economic Perspective an Transfer Pricing, in: Handbook of Management Accounting (C. S. Chapman, A. G. Hopwood, and M. D. Shields, eds.), 673 – 693.Google Scholar
  15. Harris, D., and R. Sansing (1998), Distortions Caused by the Use of Arm’s-Length Transfer Prices, Journal of the American Taxation Association, 40 – 50.Google Scholar
  16. Hirshleifer, J. (1956), On the Economics of Transfer Pricing, Journal of Business, 172 – 184.Google Scholar
  17. Horngren, C., G. Foster, S. Datar, M. Rajan, and C. Ittner (2009), Cost Accounting: A Managerial Emphasis, 13th ed., Englewood-Cliffs.Google Scholar
  18. Hyde, C. and C. Choe (2005), Keeping Two Sets of Books: The Relationship Between Strategic and Tax Transfer Prices, Journal of Economics and Management Strategy 14(1), 165 – 186.CrossRefGoogle Scholar
  19. Johnson, N. (2006), “Divisional Performance Measurement and Transfer Pricing for Intangible Assets”, Review of Accounting Studies 11, 339 – 365.CrossRefGoogle Scholar
  20. Kaplan, R., and A. Atkinson (1998), Advanced Management Accounting, 3rd ed., Upper Saddle River.Google Scholar
  21. Lev, B. (2000), Intangible Assets, Brookings Institution Press, Washington D.C.Google Scholar
  22. Narayanan, V.G., and M. Smith (2000), Impact of Competition and Taxes on Responsibility Center Organization and Transfer Prices, Contemporary Accounting Research 17 (3), 497 – 529.CrossRefGoogle Scholar
  23. Nöldeke, G. and K. Schmidt (1998), Sequential Investments and Options to Own, RAND Journal of Economics 29(4), 633 – 653.CrossRefGoogle Scholar
  24. Pfeiffer, T., U. Schiller, and J. Wagner (2011), Cost Based Transfer Pricing, Review of Accounting Studies (forthcoming).Google Scholar
  25. Sahay, S. (2003), Transfer Pricing Based on Actual Cost, Journal of Management Accounting Research 15, 177 – 192.CrossRefGoogle Scholar
  26. Schoen, W. (2010), Transfer Pricing-Business Incentives, International Taxation and Corporate Law, Working paper, Max-Planck Institute, Munich.Google Scholar
  27. Smith, M. (2002a), Ex Ante and Ex Post Discretion Over Arm’s Length Transfer Prices, The Accounting Review 77 (January), 161 – 184.CrossRefGoogle Scholar
  28. Smith, M. (2002b), Tax and Incentive Trade-Offs in Multinational Transfer Pricing, Journal of Accounting Auditing & Finance 17 (3), 209 – 236.Google Scholar
  29. Tang, R. (2003), Current Trends and Corporate Cases in Transfer Prices, Westport.Google Scholar
  30. Springsteel, I. (1999), Separate but Unequal, CFO Magazine (August).Google Scholar
  31. Vaysman, I. (1996), A Model of Cost-Based Transfer Pricing, Review of Accounting Studies 1(1), 73 – 108.CrossRefGoogle Scholar
  32. Wilson, P. (1993), The Role of Taxes in Location and Sourcing Decisions, in: Studies in International Taxation (A. Giovannini, R. Hubbard and J. Slemrod, eds.), Chicago.Google Scholar
  33. Zimmerman, J. (2006), Accounting for Decision Making and Control, New York, NY.Google Scholar

Copyright information

© Springer-Verlag Berlin Heidelberg 2012

Authors and Affiliations

  • Moritz Hiemann
    • 1
  • Stefan Reichelstein
    • 1
  1. 1.Stanford Graduate School of BusinessStanfordUSA

Personalised recommendations