Transfer pricing for multinational enterprises. An integrated approach E-Book

Erik Wintzer

• Herausgeber: GRIN Verlag
• Sprache: Englisch

Veröffentlichungsjahr: 2003

Beschreibung

Diploma Thesis from the year 2003 in the subject Business economics - Accounting and Taxes, grade: 2,0 (B), Schmalkalden University of Applied Sciences (Economics), course: Cost Pricing und Controlling, language: English, abstract: Globalization of business has replaced the concept of national exchanges with global transactions. Consequently, the changes due to globalization play a big role in the strategy of multinational enterprises. The volume of intrafirm trade is huge and expanding rapidly as multinationals globalize their investment and trade. Today, a considerable proportion of world trade takes place within multinational enterprises. This indicates the importance of transfer pricing conspicuously. The intention of this book is to describe the challenge of transfer pricing holistically and to exhibit some options for multinational enterprises determining their transfer prices. While management accounting as well as strategic aspects of transfer prices are also relevant for enterprises, which are not multinational, external aspects (specifically tax accounting) are typically only crucial for multinationals. This book is an attempt to integrate all aspects of transfer pricing targeting practitioners as well as economists.

Leseprobe

Table of Content

1 Introduction.

2 Transfer Pricing and Management Accounting.

2.1 Functions of Transfer Prices in Management Accounting

2.1.1 Coordination

2.1.2 Performance Evaluation.

2.2 Types of Transfer Prices.

2.2.1 Market-based Transfer Prices

2.2.2 Cost-based Transfer Prices

2.2.3 Negotiated Transfer Prices

3 Transfer Pricing and Strategy

3.1 Divisional Strategy Implementation with Transfer Pricing

3.1.1 Encouraging Divisional Competitive Position.

3.1.2 The Enforcement of Retrenchment

3.2 Strategic Transfer Pricing

3.2.1 The Model of Strategic Transfer Pricing

3.2.4 Practical and Theoretical Implications

4 Transfer Pricing, Multinational Enterprises, and External

4.1 Transfer Pricing for Tax Accounting - The Primary

4.1.2 The Determination of Tax Transfer Prices

4.1.3 Thin Capitalization.

4.2 Transfer Pricing and Secondary External Constraints.

4.2.1 Import Duties

4.2.2 Economic Restrictions

4.2.3 Currency Fluctuations

4.2.4 Withholding Taxes

4.2.5 Outside Shareholders of Specific Divisions

4.2.6 Paying Taxes and Public Relations

4.3 Transfer Pricing and Governmental Considerations

4.3.1 Globalization and Tax Competition.

4.3.2 Political Structures and Regulations

4.4 Integrated Multinational Transfer Pricing - Management

4.4.1 The Application of Several Books

4.4.3 Mathematical Programming Approaches

5 Concluding Remarks

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Transfer Pricing for Multinational Enterprises:

eingereicht von:

Erik Wintzer

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References.............................................................................................................39

Page 1

1 Introduction

Globalization of business has replaced the concept of national exchanges with global transactions. Consequently, the changes due to globalization play a big role in the strategy of multinational enterprises1(MNEs). Certainly, the vo lume of intrafirm trade2is huge and expanding rapidly as MNEs globalize their investment and trade.3Today, a considerable proportion of world trade takes place inside MNEs.4This indicates the importance of transfer pricing5conspicuously.

This paper is an attempt to integrate all aspects MNEs have to deal with in transfer pricing. In the main, this means aspects of:

•management accounting,

•strategy, and

•external constraints.

1The term “multinational enterprise” is adopted in this paper as a vertically integrated enterprise with units in at least two different countries. The units involved can be departments, divisions, or related enterprises and will be called in this paper as “divisions.” The vertical integration is the combination of technologically distinct production, distribution, selling, or other economic processes inside a single enterprise. Cf. Porter (1980), 300. Contrary to distinctions made by some a uthors or institutions, the adjectives “multinational,” “international,” “global,” “world-wide,” “supranational,” and “transnational” are considered interchangeably in this paper. The only adjective used in this context is “multinational.”

2The term “intrafirm trade” is adopted in this paper as transfers between divisions of a single enterprise in one or more countries. The single transfers are “intrafirm transactions.”

3Cf. e.g. Eccles (1985), 2 -3; Kant (1989), 233; Lozano/Boni (2002), 169;

Martinson/Englebrecht/Mitchell (1999), 93; Plasschaert (1979), 17; Sansing (1999), 119; Tang (1997), 1.

4Cf. e.g. Kopits (1976), 624; Martinson/Englebrecht/Mitchell (1999), 92; Martinson/McKee (2001), 40; Neighbour (2002), 30.

5The term “transfer price” is adopted in this paper as the per-unit valuation of goods and services being shifted between divisions of a single enterprise. The term “transfer pricing” means occupying with transfer prices.

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While management accounting as well as strategic aspects are also relevant for enterprises, which are not multinational, external aspects are only crucial for MNEs.6For this reason, this paper focuses on external aspects, especially profit taxes7, more intensely.

There is already a considerable literature on transfer pricing. The intention of this paper is to describe the problem of transfer pricing as a whole and to exhibit some options for MNEs determining transfer prices. It is merely a short approach to that difficult problem, emphasizing some issues of, from the author’s point of view, particular importance. No claim on completeness is laid.

2 Transfer Pricing and Management Accounting

Enterprises of any noticeable size face the task of determining transfer prices, because they find it necessary to transfer goods and services internally.8The problem of transfer pricing between divisions of a vertically integrated enterprise is formally analogous to the traditional problem of economics - the efficiency of the price mechanism.9

Coase (1937)10raised the question why is observed so much economic activity i nside formal organizations, although markets are such efficient mechanisms. His answer was in terms of the costs of transacting in a world of information asymmetry11. If the

6Cf. Itagaki (1979), 447.

7The taxes treated in this paper are mo stly profit taxes. Withholding taxes are only considered in chapter 4.2.4. Other tax types are neglected.

8Cf. Benke/Edwards (1980), 1; Lozano/Boni (2002), 169-170.

9Cf. Albach (1974), 216-242; Gould (1964), 61; Schmalenbach (1908/1909), 166-168.

10Cf. Coase (1937), 386-405.

11Information asymmetry exists in situations where all parties in an enterprise do not have identical information, e.g. information about costs, prices, efforts, skills, preferences, and so on. Basically, information asymmetry between divisional managers and central management induces the need of a coordination mechanism like transfer pricing in the context of management accounting. Cf. e.g.