Internal and External Factors on Firms’ Transfer Pricing Decisions: Insights from Organization Studies

Well understood in economics, accounting, finance, and legal research, transfer pricing has rarely been comprehensively explored in organization management literature. This paper explores some theoretical explanations of transfer pricing within multidivisional firms drawing insights from various organizational theories – primarily institutional theory, transaction cost economics, and social networks – to develop a conceptual model of transfer pricing. This model focuses on the nature of multidivisional firms’ internal transfers, internal and external technological environments, and internal and external social environments. We highlight the importance of transfer pricing as a key strategic dimension to understand intra-firm flows and their associated costs.theory, value, transfer pricing; intra-firm flows, multidivisional firm.

The Dark Side of Transfer Pricing: Its Role in Tax Avoidance and Wealth Retentiveness

In conventional accounting literature, ?transfer pricing? is portrayed as a technique for optimal allocation of costs and revenues amongst divisions, subsidiaries and joint ventures within a group of related entities. Such representations of transfer pricing simultaneously acknowledge and occlude how it is deeply implicated in processes of wealth retentiveness that enable companies to avoid taxes and facilitate the flight of capital. A purely technical conception of transfer pricing calculations abstracts them from the politico-economic contexts of their development and use. The context is the modern corporation in an era of globalized trade and its relationship to state tax authorities, shareholders and other possible stakeholders. Transfer pricing practices are responsive to opportunities for determining values in ways that are consequential for enhancing private gains, and thereby contributing to relative social impoverishment, by avoiding the payment of public taxes. Evidence is provided by examining some of the transfer prices practices used by corporations to avoid taxes in developing and developed economies

Transfer pricing: strategies, practices, and tax minimization

Using a survey of tax executives from multinational corporations, we document that some firms set their transfer pricing strategy to minimize tax payments, but more firms focus on tax compliance. We estimate that a firm focusing on minimizing taxes has a GAAP effective tax rate that is 6.6 percentage points lower and generates about $43 million more in tax savings, on average, than a firm focusing on tax compliance. Available COMPUSTAT data on sample firms confirm our survey‐based inferences. We also find that transfer pricing‐related tax savings are greater when higher foreign income, tax haven use, and R&D activities are combined with a tax minimization strategy. Finally, compliance‐focused firms report lower FIN 48 tax reserves than tax‐minimizing firms, consistent with the former group using less uncertain transfer pricing arrangements. Collectively, our study provides direct evidence that multinational firms have differing internal priorities for transfer pricing, and that these differences are strongly related to the taxes reported by these firms.First author draf

Funds transfer pricing in banking

Every bank needs to better understand the sources of its profitability. Whatever the size of the bank, funds transfer pricing (FTP) can be used to help managing the bank's profitability by analyzing earnings for the whole institution or for different profit centers. In today’s banking environment, it is essential to look at the earnings both as a whole and broken down into various components. Funds Transfer Pricing is an analysis tool that can be used to help a bank measure its profitability in a variety of different ways. It allows management to compare the profitability of different product lines within the company, and it can be drilled down even further to allow comparison between individual employees. It is also very useful for comparison between branches. This study will reveal the role of Fund Transfer Pricing (FTP) in banks.funds transfer pricing, profit, bank, business units

Gray Markets and Multinational Transfer Pricing

Gray markets arise when a manufacturer's products are sold outside of its authorized channels, for instance when goods designated for a foreign market are resold domestically. One method multinationals use to combat gray markets is to increase internal transfer prices to foreign subsidiaries in order to increase the gray market's cost base. We illustrate that, when a gray market competitor is present, the optimal price for internal transfers not only exceeds marginal cost, but is also a function of the competitiveness of the upstream economy. Moreover, the presence of a gray market competitor may cause unintended social welfare consequences when domestic governments mandate the use of arm's length transfer prices between international subsidiaries. When markets are sealed, arm's length transfer pricing strictly increases domestic social welfare. In contrast, we demonstrate that when a gray market competitor is present, mandating the use of arm's length transfer pricing decreases domestic social welfare when the domestic market is sufficiently large relative to the foreign market. Specifically, a shift to arm's length transfer pricing erodes domestic consumer surplus by making the gray market less competitive domestically, which in turn may offset any domestic welfare gains that accompany a shift to arm's length transfer pricing. Finally, the analysis illustrates that in a gray market setting, the transfer price that maximizes a multinational's profits may also be the same one that maximizes the social welfare of the domestic economy that houses it.transfer pricing, gray markets, regulation

Transfer Pricing Risk Awareness of Multinational Corporations - Evidence from a Global Survey

This paper investigates the transfer pricing risk awareness of multinational firms using cross-sectional data of more than 350 firms located in 24 countries and classified in 12 industries. Moving beyond the sole tax optimization motives of multinational firms, we extend the existing literature by using unique firm-level information such as that the transfer pricing risk awareness is assessed and reported by the person ultimately responsible for transfer pricing. We find that the level of transfer pricing risk awareness of multinational companies predominantly depends on (i) the industry a firm operates in, (ii) a country's risk classification with respect to its transfer pricing regulations (e.g. penalty regimes in case of non-compliance with transfer pricing regulations), (iii) firm size and (iv) the interaction effect of the first two factors. By way of contrast, the time of introduction of transfer pricing regulations and also tax considerations do not seem to play a crucial role for transfer pricing risk perceptions