Skip to main content
Fachgebiete
Automobil + Motoren Bauwesen + Immobilien Business IT + Informatik Elektrotechnik + Elektronik Energie + Nachhaltigkeit Finance + Banking Management + Führung Marketing + Vertrieb Maschinenbau + Werkstoffe Versicherung + Risiko
DE
EN
Bücher
Zeitschriften
Themenseiten
Organisationspsychologie Projektmanagement Marketing Smart Manufacturing
Weitere Formate
Podcasts Webinare Technik Webinare Wirtschaft Kongresse Veranstaltungskalender Awards
Jetzt Einzelzugang starten
Zugang für Unternehmen
Referenzkunden
SLX-Digitalkonferenz: Zukunftswerkstatt 2024

Mehr Umsatz mit Top-Kontakten

Am 7. Mai erfahren Sie, wie Vertriebsteams Leadgenerierung, Leadnurturing und Leadstrategien effizient steuern können.
Erweiterte Suche
Anmelden
nach oben
Review of Accounting Studies
Erschienen in: Review of Accounting Studies 2/2015

01.06.2015

The optimal focus of transfer prices: pre-tax profitability versus tax minimization

verfasst von: Jan Thomas Martini

Erschienen in: Review of Accounting Studies | Ausgabe 2/2015

Einloggen

Aktivieren Sie unsere intelligente Suche, um passende Fachinhalte oder Patente zu finden.

search-config
loading …

Abstract

This paper studies transfer prices influencing managerial decisions and determining corporate taxes in a multinational firm. Common sense suggests that the transfer price decision should be made to maximize the firm’s after-tax profit and thus achieve the optimal trade-off between pre-tax profitability and tax minimization. Based on a model of a decentralized firm facing asymmetric information with respect to operations, I examine why this conclusion does not hold in general. In particular, I demonstrate that a policy of negotiated transfer pricing, under which the divisions exploit their superior information but select the transfer price to maximize the firm’s pre-tax profit, is the firm’s optimal organizational choice if the high-tax division’s productivity is high. With respect to the firm’s discretion over the transfer price, I identify situations where the firm’s optimal policy choice does not depend on the arm’s length range and where less discretion increases the firm’s profitability.
Vorheriger Artikel Does concrete language in disclosures increase willingness to invest?
Nächster Artikel Does increased board independence reduce earnings management? Evidence from recent regulatory reforms

Sie haben noch keine Lizenz? Dann Informieren Sie sich jetzt über unsere Produkte:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

  • über 102.000 Bücher
  • über 537 Zeitschriften

aus folgenden Fachgebieten:

  • Automobil + Motoren
  • Bauwesen + Immobilien
  • Business IT + Informatik
  • Elektrotechnik + Elektronik
  • Energie + Nachhaltigkeit
  • Finance + Banking
  • Management + Führung
  • Marketing + Vertrieb
  • Maschinenbau + Werkstoffe
  • Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Jetzt informieren

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

  • über 67.000 Bücher
  • über 340 Zeitschriften

aus folgenden Fachgebieten:

  • Bauwesen + Immobilien
  • Business IT + Informatik
  • Finance + Banking
  • Management + Führung
  • Marketing + Vertrieb
  • Versicherung + Risiko




Jetzt Wissensvorsprung sichern!

Jetzt informieren
Anhänge
Nur mit Berechtigung zugänglich
Fußnoten
1
See, for example, Anthony and Govindarajan (2000, p. 201) or Tang (2002, p. 42) for the functions of (international) transfer prices and their empirical prevalence.
 
2
The figures relate to those firms using the same transfer price for both management and tax purposes.
 
3
See Hyde and Choe (2005) for a model of a firm that deliberately fails to comply with the tax rules.
 
4
See Keuschnigg and Devereux (2013) for a similar assumption.
 
5
With a slight abuse of notation, \(\theta \) is used for both the random variable and its realization.
 
6
In terms of transfer pricing methods for tax purposes as described in 26 CFR § 1.482-3 or OECD (2010, § II) the assumed range matches with the comparable uncontrolled price method, the resale price method, and the cost plus method based on budgeted costs. See Ernst & Young (2010, p. 13) for the prevalence of these methods.
 
7
The case study in Cools and Slagmulder (2009) suggests that firms might eliminate price negotiations to substantiate their tax compliance efforts. Here, I assume that tax compliance has no effect on the policies.
 
8
The model refers to a constant transfer price. With such a simple contract, the central office cannot design a truth-telling mechanism to extract the divisions’ knowledge.
 
9
See Czechowicz et al. (1982), Davis (1994), Granfield (1995), Durst (2002), and Cools and Slagmulder (2009) for confirmation of this argument.
 
10
See 26 USC §§ 1.6038A, 1.6038C of the US Internal Revenue Code and OECD (2010) for the (statutory) disclosure requirements and the associated penalties. The PATA Transfer Pricing Documentation Package (Pacific Association of Tax Administrators 2011) is suggestive of the information regularly provided to tax authorities. During tax audits, tax authorities even request access to the firm’s electronic information system and operational personnel (Ernst & Young 2010, p. 14).
 
11
Czechowicz et al. (1982, p. 59) report a corresponding share of firms of 84 %, Ernst & Young (2001, p. 6) of 77 %, and Ernst & Young (2003, p. 17) of 80 %.
 
12
Due to the linear setting of the model, the joint trade decision can equivalently be interpreted as bilateral negotiations or as one division setting the quantity and the other accepting or rejecting this decision. The sequence of the trade decision and the transfer price agreement does not play a role either.
 
13
Given internal trade, any transfer price not equal to \(p^{*}\) as given by (13) is inefficient because it does not minimize taxes. Therefore, one may wonder whether NTP or ATP benefit from revising or postponing the transfer price decision after the trade decision is made; see Martini (2011) for an analysis in this direction. The answer to this question is no, which is due to the adverse effect on the divisions’ trade decisions.
 
14
Figure 3 is based on the parameter setting \(\omega _d/\omega _u=2\) and \((1 - \tau _d)/(1 - \tau _u) = 0.824\) and thereby corresponds to scenario A from Table 1.
 
15
According to OECD (2013), the tax ratio varies between 0.696 and 1.0 for the OECD member countries; see column “Combined corporate income tax rate” for 2013 in Table II.1 “Basic (non-targeted) corporate income tax rates”. Concentrating on the G7 states, it varies between 0.791 and 0.967 for relations involving the United States.
 
16
Numerical examples contain rounded values. The corporate tax rates in Table 1 are taken from OECD (2013).
 
17
There are two transfer prices implying an expected profit shift of 12.5I under ATP. I chose the one inducing the higher expected after-tax profit.
 
18
As shown in Lemma 5 in “Appendix 2”, the inclusion of CP does not interfere with this conclusion.
 
19
According to Lemma 6 in “Appendix 2”, CP does not benefit from narrowing the arm’s length range. Hence, NTP also dominates CP for both considered degrees of discretion.
 
20
The inclusion of CP does not make Proposition 5 obsolete as CP is not an optimal policy choice if the difference in the tax levels becomes sufficiently small. This is because the performance of CP is merely driven by profit shifting.
 
21
The Kalai–Smorodinsky solution goes for the Pareto-efficient profit allocation inducing equal divisional pre-tax profits relative to the divisions’ maximal pre-tax profits. Accordingly, the negotiated transfer price solves \(\pi _u(\theta , p)\big /\pi _u \left( \theta , \min \{\overline{p}, \overline{p}_0\}\right) = \pi _d(\theta , p)\big /\pi _d ( \theta , \max \{\underline{p}, \underline{p}_0\}) \) with \(\pi _d(\theta , \overline{p}_0)=0\) and \(\pi _u(\theta , \underline{p}_0)=0\). In this sense, the Kalai–Smorodinsky solution averages the transfer prices \(\max \{\underline{p}, \underline{p}_0\}\) and \(\min \{\overline{p}, \overline{p}_0\}\).
 
22
Again, narrowing the arm’s length range does not reverse the dominance of NTP over CP; see footnote 19.
 
23
See, for example, Rosenmüller (2000, § 8) for the details.
 
Literatur
Anthony, R. N., & Govindarajan, V. (2000). Management control systems (10th ed.). Boston: McGraw-Hill.
Baldenius, T., Reichelstein, S., & Sahay, S. A. (1999). Negotiated versus cost-based-transfer pricing. Review of Accounting Studies, 4(2), 67–91.CrossRef
Baldenius, T. (2000). Intrafirm trade, bargaining power, and specific investments. Review of Accounting Studies, 5(1), 27–56.CrossRef
Baldenius, T., Melumad, N. D., & Reichelstein, S. (2004). Integrating managerial and tax objectives in transfer pricing. The Accounting Review, 79(3), 591–615.CrossRef
Chan, K. H., Lo, A. W., & Mo, P. L. L. (2006). Managerial autonomy and tax compliance: An empirical study on international transfer pricing. The Journal of the American Taxation Association, 28(2), 1–22.CrossRef
Chiles, C. R., & Dau, M. T. (2005). An analysis of current supply chain best practices in the retail industry with case studies of Wal-Mart and Amazon.com (master’s thesis). Massachusetts Institute of Technology—Engineering Systems Division, Cambridge.
Chwolka, A., Martini, J. T., & Simons, D. (2010). The value of negotiating cost-based transfer prices. Business Research, 3(2), 113–131.CrossRef
Cools, M., Emmanuel, C., & Jorissen, A. (2008). Management control in the transfer pricing tax compliant multinational enterprise. Accounting, Organizations and Society, 33(6), 603–628.CrossRef
Cools, M., & Slagmulder, R. (2009). Tax-compliant transfer pricing and responsibility accounting. Journal of Management Accounting Research, 21, 151–178.CrossRef
Czechowicz, I. J., Choi, F. D. S., & Bavishi, V. B. (1982). Assessing foreign subsidiary performance: Systems and practices of leading multinational companies. New York: Business International Corporation.
Davis, Jr., H. T. (1994). Transfer prices in the real world—10 steps companies should take before it’s too late. CPA Journal Online.
Dikolli, S. S., & Vaysman, I. (2006). Information technology, organizational design, and transfer pricing. Journal of Accounting and Economics, 41(1–2), 201–234.CrossRef
Dürr, O. M., & Göx, R. F. (2011). Strategic incentives for keeping one set of books in international transfer pricing. Journal of Economics and Management Strategy, 20(1), 269–298.CrossRef
Durst, M. C. (2002). Management vs. tax accounting in intercompany transfer pricing. Tax Management International Journal, 31(2), 95–103.
Edlin, A. S., & Reichelstein, S. (1995). Specific investment under negotiated transfer pricing: An efficiency result. The Accounting Review, 70(2), 275–291.
Elitzur, R., & Mintz, J. (1996). Transfer pricing rules and corporate tax competition. Journal of Public Economics, 60(3), 401–422.CrossRef
Granfield, M. E. (1995). Economic analysis and the defense of transfer pricing structures and results. In C. J. Chandler, I. H. Plotkin, & J. V. Mirga (Eds.), Transfer pricing: Economic, managerial, and accounting principles (ch. 2). Washington: Tax Management Inc.
Haake, C.-J., & Martini, J. T. (2013). Negotiating transfer prices. Group Decision and Negotiation, 22(4), 657–680.CrossRef
Halperin, R., & Srinidhi, B. (1991). U.S income tax transfer-pricing rules and resource allocation: The case of decentralized multinational firms. The Accounting Review, 66(1), 141–157.
Horst, T. (1971). The theory of the multinational firm: Optimal behavior under different tariff and tax rates. Journal of Political Economy, 79(5), 1059–1072.CrossRef
Hyde, C. E., & Choe, C. (2005). Keeping two sets of books: The relationship between tax and incentive transfer prices. Journal of Economics and Management Strategy, 14(1), 165–186.CrossRef
Johnson, N. B. (2006). Divisional performance measurement and transfer pricing for intangible assets. Review of Accounting Studies, 11(2/3), 339–365.CrossRef
Kalai, E., & Smorodinsky, M. (1975). Other solutions to Nash’s bargaining problem. Econometrica, 43, 513–518.CrossRef
Keuschnigg, C., & Devereux, M. P. (2013). The arm’s length principle and distortions to multinational firm organization. Journal of International Economics, 89(2), 432–440.CrossRef
Martini, J. T. (2011). Transfer pricing for coodination and profit allocation. Australian Journal of Business and Management Research, 1(6), 7–26.
Narayanan, V. G., & Smith, M. (2000). Impact of competition and taxes on responsibility center organization and transfer prices. Contemporary Accounting Research, 17(3), 497–529.CrossRef
Nash, J. F. (1950). The bargaining problem. Econometrica, 18(2), 155–162.CrossRef
Nielsen, S. B., Raimondos-Møller, P., & Schjelderup, G. (2008). Taxes and decision rights in multinationals. Journal of Public Economics Theory, 10(2), 245–258.CrossRef
OECD. (2010). OECD Transfer pricing guidelines for multinational enterprises and tax administrations 2010. Paris: Organisation for Economic Co-operation and Development OECD.
Pfeiffer, T., Schiller, U., & Wagner, J. (2011). Cost-based transfer pricing. Review of Accounting Studies, 16(2), 219–246.CrossRef
Rosenmüller, J. (2000). Game theory: Stochastics, information, strategies, and cooperation. Boston, MA: Kluwer Academic Publishers.CrossRef
Samuelson, L. (1982). The multinational firm with arm’s length transfer price limits. Journal of International Economics, 13(3–4), 365–374.CrossRef
Sansing, R. (1999). Relationship-specific investments and the transfer pricing paradox. Review of Accounting Studies, 4(2), 119–134.CrossRef
Schiller, U. (1999). Information management and transfer pricing. European Accounting Review, 8(4), 655–673.CrossRef
Shunko, M., Debo, L., & Gavirneni, S. (2014). Transfer pricing and sourcing strategies for multinational firms. Production and Operations Management, 23(12), 2043–2057.CrossRef
Smith, M. (2002a). Ex ante and ex post discretion over arm’s length transfer prices. The Accounting Review, 77(1), 161–184.CrossRef
Smith, M. (2002b). Tax and incentive trade-offs in multinational transfer pricing. Journal of Accounting, Auditing and Finance, 17(3), 209–236.
Tang, R. Y. W. (2002). Current trends and corporate cases in transfer pricing. Westport: Quorum Books.
Vaysman, I. (1998). A model of negotiated transfer pricing. Journal of Accounting and Economics, 25(3), 349–384.CrossRef
Wagenhofer, A. (1994). Transfer pricing under asymmetric information: An evaluation of alternative methods. European Accounting Review, 3(1), 71–103.CrossRef
Wielenberg, S. (2000). Negotiated transfer pricing, specific investment, and optimal capacity choice. Review of Accounting Studies, 5(3), 197–216.CrossRef
Williamson, O. E. (1985). The economic institutions of capitalism: Firms, markets, relational contracting. New York, NY: The Free Press.
Metadaten
Titel
The optimal focus of transfer prices: pre-tax profitability versus tax minimization
verfasst von
Jan Thomas Martini
Publikationsdatum
01.06.2015
Verlag
Springer US
Erschienen in
Review of Accounting Studies / Ausgabe 2/2015
Print ISSN: 1380-6653
Elektronische ISSN: 1573-7136
DOI
https://doi.org/10.1007/s11142-015-9321-3

Weitere Artikel der Ausgabe 2/2015

Review of Accounting Studies 2/2015 Zur Ausgabe

OriginalPaper

Accounting conservatism and Street earnings

OriginalPaper

Bank loan spread and private information: pending approval patents

OriginalPaper

Anticipation of management forecasts and analysts’ private information search

OriginalPaper

Does increased board independence reduce earnings management? Evidence from recent regulatory reforms

OriginalPaper

Cross-jurisdictional income shifting and tax enforcement: evidence from public versus private multinationals

OriginalPaper

Do sophisticated investors use the information provided by the fair value of cash flow hedges?