lnternational transfer pricing strategies for minimizing global income taxes

Optimal financiai strategies are criticai for long term survival in competitive international markets. Financial strategies pertaining to transfer pricing have become increasingly important as income tax authorities seek additional revenues through increased monitoring of company practices. In this first of two articles, optimal tax strategies are presented after reviewing the transfer pricing concept and the rationale underlying governments' increased focus on transfer pricing. In the second forthcoming article, we analyze the effect of government restrictions on optimal pricing strategies.

International transfer pricing restrictions: impact on corporate financial policy

Transfer pricing is a pervasive issue that presents significant tax savings potential concerning international enterprises. The authors discuss company incentives to manage transfer prices in an article appearing in the preceding issue of this journal. In response to these incentives, governments have increasingly enacted and enforced domestic restrictions on transfer prices. In this article, contemporary norms restricting transfer pricing are analyzed. The OEGO and US pricing standards are assessed and Brazil's recent application of these standards is considered. Transfer pricing methods are described and evidence of their use is presented. We conclude by describing an intercompany transfer pricing policy intended to facilitate internaI financiaI management and minimize externaI tax threats.

The system of Transfer Pricing in a multinational

Transfer prices are used by the majority of firms worldwide when intermediate products or services are transferred within the same organization. These prices are reported as revenue for the selling entity (division, unit, department etc.) and as cost for the buying entity. Nevertheless, transfer prices lead to many disputes among managers in the same organization as transfer prices influence the performance of their entities. In cross-border transactions, transfer prices can be used by firms to reduce corporate taxes and thus, increase total firm profits. In order to fight against this firms’ practice, tax authorities require firms to establish a transfer pricing system in accordance with OECD1 Transfer Pricing Guidelines.

Multinational Firms’ Heterogeneity in Tax Responsiveness: the Role of Transfer Pricing

In this paper we show that the ability of multinational firms to manipulate transfer prices affects the tax sensitivity of foreign direct investment (FDI). We offer a model of international capital allocation where firms are heterogeneous in their ability to manipulate transfer prices. Perhaps paradoxically, we show that the ability to shift profits can make parent companies' investment more sensitive to host-country tax rates, as long as investors expect fisscal authorities to use price and profit detection methods. We then offer a comprehensive empirical study to test our predictions in the case of Japanese FDI. We exploit the finding that the unobservable ability to manipulate transfer prices is correlated with whole ownership of a±liates and R&D expenditure. Based on country, parent firm and sector characteristics, we estimate an investment equation on a sample of 3614 Japanese affiliates in 49 emerging countries. We obtain a greater semi-elasticity of investment to the statutory tax rate in a±liates that are wholly-owned and that have R&D intensive parents. We interpret these results as indirect evidence that abusive transfer pricing is one of the determinants of FDI activity.

Transfer pricing tool development process based on valve package production costs

Tämän diplomityön päätavoitteena oli parantaa kehitetyn kustannusperusteisen siirtohinnoittelutyökalun ominaisuuksia osastokohtaisen kustannusarviointiprosessin käyttöön. Työ on vaikeutunut lähimenneisyyden heikosta hintakyselyiden vastauskyvystä. Työn pääongelmana oli kerätä luotettavaa tuotannonohjausjärjestelmän kustannusaineistoa osittain vanhentuneista vakioventtiilien koneistus- ja materiaalitiedosta. Tutkimuksessa käytetyt tärkeimmät tutkimusmenetelmät voidaan jakaa siirtohinnoittelu- ja kustannusarvioprosessien kirjallisuustutkimukseen, kenttäanalyysiin ja nykyisen Microsoft Excel –siirtohinnoittelutyökalun kehittämiseen eri osastojen rajapinnassa. Siirtohinnoittelumenetelmät ovat yleisesti jaettu kustannus-, markkina- ja neuvotteluperusteisiin malleihin, jotka harvoin sellaisenaan kohtaavat siirtohinnoittelulle asetetut tavoitteet. Tämä ratkaisutapa voi johtaa tilanteisiin, jossa kaksi erillistä menetelmää sulautuvat yhteen. Lisäksi varsinaiseen siirtohinnoittelujärjestelmään yleensä vaikuttavat useat sisäiset ja ulkoiset tekijät. Lopullinen siirtohinnoittelumenetelmä tulisi ehdottomasti tukea myös yrityksen visiota ja muita liiketoiminnalle asetettuja strategioita. Työn tuloksena saatiin laajennettu Microsoft Excel –sovellus, joka vaatii sekä vuosittaista että kuukausittaista erikoisventtiilimateriaalien hinta- ja toimitusaikatietojen päivittämistä. Tämä ratkaisutapa ehdottomasti parantaa kustannusarviointiprosessia, koska myös alihankkijatietoja joudutaan tutkimaan systemaattisesti. Tämän jälkeen koko siirtohinnoitteluprosessia voidaan kehittää muuntamalla kokoonpano- ja testaustyövaiheiden kustannusrakennetta toimintoperustaisen kustannuslaskentamallin mukaiseksi.

Transfer pricing as a means for motivating management of profit centers

The main objective of this study is to analyze the role and potential of transfer pricing as a means of management control in large organizations. The special emphasis is on analyzing the potential of transfer pricing when we are motivating the profit center managers. The research approach is theoretical and literature reviews include studies about profit center organizations, performance measurement and analysis, incentive systems, transfer pricing techniques and agency theory. Based on the analysis, it seems that transfer pricing is a suitable tool for controlling, motivating and managing profit center managers. This requires that the performance measurement can be done fairly and transfer prices are set using fair assumptions. The motivating effects of transfer pricing can be enhanced if the reward system is connected to performance measurement system. In synthesis there is presented effects of transfer pricing to profit center managers behavior. There is also presented opinion about fair transfer pricing policy.

Transfer pricing documentation differences in Finland and China - Case company study

This Master’s Thesis deals with the topic of transfer pricing documentation in Finland and China. The goal of the research is to find what kind of differences exist in a single case company’s transfer pricing documentation when following Chinese or Finnish transfer pricing regulations. The study is carried out as a case study research. The theoretical framework consists of information from different transfer pricing topics and transfer pricing documentation regulations in China and Finland. The main research material was the case company’s transfer pricing documents with the support of open discus-sion with one of the case company’s employees. The study compared the 2009 and 2010 documents. The 2009 document was done based on the Finnish method while the 2010 document was based on the Chinese documentation principles. The conclusion made is that the content of the documents was heavily similar, while the main differences come in the way the content is presented and the level of detail used in the documents.

Transfer Pricing in the Decentralized Multinational Corporation

This paper considers how the multinational corporation's transfer price responds to changes in international corporate effective tax rates. It extends the decentralized decision-making analysis of transfer pricing in the context of different tax rates. It adopts and extends Bond's (1980) model of the decentralized multinational corporation that assumes centralized transfer pricing. The direction of transfer price change is as expected, while the magnitude of change is likely to be less than predicted by the Horst (1971), centralized decision-making model. The paper extends the model further by assuming negotiated transfer pricing, where the analysis is partitioned into perfect and imperfect information cases. The negotiated transfer pricing result reverts to the Horst (1971), or centralized decision-making, result, under perfect information. Under imperfect information, the centralized decision-making result obtains when top management successfully informs division general managers or it successfully implements a non-monetary reward scheme to encourage division general managers to cooperate. Under simplifying assumptions, centralized decision-making dominates decentralized decision-making, while negotiated transfer pricing weakly dominates centralized transfer pricing.