Transfer Price Confusion? - Proposing a comprehensive Taxonomy for Academia and Practitioners E-Book

Arne Schulke

• Herausgeber: Books on Demand
• Kategorie: Fachliteratur
• Serie: Workingpaper
• Sprache: Englisch

Seitenzahl: 27

Veröffentlichungsjahr: 2024

Beschreibung

Transfer prices (TP) are charged for products or services exchanged between units within a decentralized organization. A vast body of literature from three very different academic disciplines (legal, management and economics) is concerned with the topic of Transfer Pricing. Their perspectives as well as terminology differ and are sometimes not aligned. To abate this, the article proposes a unified taxonomy on Transfer Prices that distinguishes three very distinct characteristics of any TP: its Determination Method (consisting of both its Calculation Method and its Price Method), and the Determination Process by which the TP is installed. The aim of this is to guide future academic re-search and provide academics and business practitioners alike with precise language and logical structure for the design of Transfer Pricing Systems.

Leseprobe

Contents

List of Figures

List of Tables

List of Abbreviations

Abstract

1 Introduction

2 Three complexity levels, three functions of TP

3 Relevance of

4 Confusion?

5 Towards a comprehensive TP taxonomy

6 Concluding thoughts

References

List of Figures

Figure 1: TP system complexity levels

Figure 2: Proposed Transfer Pricing Taxonomy

List of Tables

Table 1: Textbook TP method comparison

List of Abbreviations

CUP

Comparable Unrelated Price (Method)

RC

Responsibility Center

TNMM

Transactional Net Margin Method

TP

Transfer Price

TPSM

Transactional Profit Split Method

Abstract

Transfer prices (TP) are charged for products or services exchanged between units within a decentralized organization. A vast body of literature from three very different academic disciplines (legal, management and economics) is concerned with the topic of Transfer Pricing. Their perspectives as well as terminology differ and are sometimes not aligned. To abate this, the article proposes a unified taxonomy on Transfer Prices that distinguishes three very distinct characteristics of any TP: its Determination Method (consisting of both its Calculation Method and its Price Method), and the Determination Process by which the TP is installed. The aim of this is to guide future academic research and provide academics and business practitioners alike with precise language and logical structure for the design of Transfer Pricing Systems.

1 Introduction

Transfer prices, unlike market prices, are a necessity born of the delegation of managerial responsibility in decentral business organizations. They are paid between independently managed units of an organization in exchange for products (goods or services). The term “unit” can stand for both Responsibility Centers (RC, e.g. Profit Center or Investment Center) or legal entities as we will specify in the following part (cf. Coenenberg/Fischer/Günther 2016: 722). The distinguishing feature is that these units are part of a larger organization that has dominating control rights over them both, and both units contribute to the overall business goals of that organization.

2 Three complexity levels, three functions of TP

Figure 1 indicates three different use cases that constitute three different levels of complexity for the design of TP systems. On level 1 on the bottom of the figure, the TP system is designed to function within a single legal entity and between RCs therein. Each RC’s performance is the responsibility of the Head of that unit; thus, the transfer price immediately affects the performance of the selling and the buying unit.

Figure 1: TP system complexity levels

Source: own illustration

A price increase of one dollar per unit for the selling unit is pure increase in profit contribution, and in turn a dollar less for the purchasing unit’s contribution. In other words, the interests of the two units’ managers are diametrical with regards to the transfer price. As the system on level 1 is purely designed for internal management control purposes, only internal rules within the legal entity’s Management Accounting system must be set up and adhered to.