Preservation of Incentives Inside the Firm: A Case Study of a Quasi-Market for Cost-Based Transfer Pricing

2019 ◽  
Vol 32 (2) ◽  
pp. 137-157
Author(s):  
Ivar Friis
Keyword(s):  
Organizational Design ◽  
Transfer Pricing ◽  
Transfer Price ◽  
Variable Cost ◽  
Control Mechanisms ◽  
Transfer Prices

ABSTRACT According to organizational economists, the implementation of market-like control mechanisms, such as transfer prices, can never completely replicate the market since “the use of high-powered incentives in firms is inherently subject to corruption” (Williamson 1985, 140). This paper illustrates that this is not necessarily always so. By means of a case study, this paper illustrates that many problems that extant research claims are related to cost-based transfer prices were mitigated through an organizational design that created a quasi-market inside the firm. The paper contributes to extant research in several ways. First, it illustrates that strong incentives are somewhat preserved through an organizational design that fosters competition between product divisions. Second, the paper shows how the specific problems related to a standard variable cost transfer price were mitigated. Finally, the paper highlights the limits of the quasi-market and describes a number of problems that required central intervention.

scholarly journals Do Government Regulations Prevent Transfer Pricing Manipulations?

2011 ◽  
Vol 4 (10) ◽  
Author(s):  
Canri Chan
Keyword(s):  
Multinational Corporations ◽  
Transfer Pricing ◽  
Cash Flows ◽  
Transfer Price ◽  
Tax Rates ◽  
Performance Measurements ◽  
Government Regulations ◽  
Transfer Prices ◽  
Profit Performance ◽  
Efficient Allocations

This study investigated the effects of government regulations and incentives on the setting of transfer prices. I found significant main effects of both variables on transfer price choices. Transfer pricing is important, particularly for Multinational Corporations (MNCs), because of increased trends toward globalization of business activities and, simultaneously, decentralization. These trends have led to increased pressures for sound internal pricing systems, specifically transfer pricing, in order for organizations to ensure optimal and efficient allocations of organization resources and to provide profit performance measurements (Tang 1992). It has generally been recognized in the literature that in order to maximize after tax cash flows, MNCs shift profits from high to low tax jurisdictions. Governments in some countries, particularly those with high tax rates, are greatly concerned as to whether or not companies attempt to avoid tax liabilities via transfer pricing manipulation, specifically in terms of trying to shift profits to lower tax jurisdictions, and have enacted laws to limit transfer price choice.

scholarly journals Cost-based transfer pricing with the existence of a direct channel in an integrated supply chain

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Jumpei Hamamura
Keyword(s):  
Supply Chain ◽  
Cost Allocation ◽  
Transfer Pricing ◽  
Variable Cost ◽  
Fixed Cost ◽  
Direct Channel ◽  
Content Type ◽  
Fixed Cost Allocation ◽  
Transfer Prices ◽  
Integrated Supply Chain

Purpose This study aims to analytically explore the economic role of transfer pricing in a vertically integrated supply chain with a direct channel, specifically when it uses cost-based transfer prices, as is frequently observed in management practices. We compare two representative transfer pricing methods: full-cost and variable-cost pricing. Although many firms open a direct channel, which affects the optimal decision on transfer prices, prior literature has not considered this case. Design/methodology/approach We demonstrate the results using a non-cooperative game theoretical approach. Findings The results show that full-cost pricing is more profitable than variable-cost pricing when the fixed cost allocation to the marketing division is low, contrary to the established position in prior studies, from which I select their benchmark case. Moreover, we obtain a counterintuitive result, whereby, the firm-wide profit of a vertically integrated supply chain increases with fixed cost allocation. Originality/value This study considers the direct channel and internal transfer pricing in a vertically integrated supply chain, while prior research only considers one or the other. This model suggests an optimal choice of cost-based transfer pricing in managerial decisions. In addition, the authors demonstrate the positive effect of increasing fixed cost allocation, which prior management studies do not show. The findings of this study have implications for managerial practice by providing insights into supply chain design and showing that firms should consider the competition between channels when making decisions about transfer pricing methods.

scholarly journals IPTEKS PENGHITUNGAN HARGA TRANSFER DAN HARGA JUAL PADA RUMAH MAKAN KHOPINOS

2019 ◽  
Vol 3 (1) ◽  
Author(s):  
Novi Swandari Budiarso ◽  
Winston Pontoh
Keyword(s):  
Transfer Pricing ◽  
Transfer Price ◽  
Selling Price ◽  
Operating Profit ◽  
Transfer Prices ◽  
Medium Enterprise ◽  
The Right ◽  
Medium Businesses ◽  
The Cost

Determination of transfer prices and selling prices is not only a matter of large companies. This problem can occur in a type of Small and medium enterprise. But sometimes managers from small and medium businesses do not realize that in their business there is a transfer price transaction that can affect the selling price of the product to external consumers and subsequently affect operating profit. In order to overcome this problem, you can use the transfer pricing method and selling price so that you get the right transfer price and selling price for a business. The results of the transfer price calculation using the cost method and the selling price using the full cost method, the results of the transfer of semi-finished products from the preparation business unit are Rp. 4,900 / unit, while the selling price of the settlement division to external consumers is Rp. 11,020 / unit .Keywords : transfer price, selling price, cost based transfer price, market based transfer price, negotiated transfer price.

scholarly journals Transfer pricing in a function of abusing tax competition instruments

Skola biznisa ◽  
2020 ◽  
pp. 137-161
Author(s):  
Ljiljana Tanasić ◽  
Teodor Petrović
Keyword(s):  
Tax Competition ◽  
Transfer Pricing ◽  
Gain Control ◽  
Developed Countries ◽  
Control Mechanisms ◽  
Tax Rate ◽  
Transfer Prices ◽  
National Tax ◽  
Suitable Area ◽  
And Control

The paper focuses on elucidating transfer pricing as a means of tax competition instruments misuse. Tax competition instruments have a key role in creating national tax attractiveness for foreign direct investment. However, in order to protect the local tax base on the basis of abuse of tax competition instruments, a large number of countries apply the principle of sources of income, i.e. taxation of business profits made by a non-resident legal entity exclusively in the country where the business was conducted and revenue generated. But with the process of globalization and the expansion of multinational companies, i.e. related legal entities, the instruments of tax competition have remained a suitable area of legally permitted transfer of profits through the application of transfer pricing. The data presented in the paper indicate that, although the trend of global corporate tax rate (as the dominant instrument of tax competition) has a downward trajectory, there are still fluctuations in rates between countries around the world, including the existing inconsistencies and ambiguities of national tax regulations. Taking this into account, the aim of the paper was to emphasize that transfer prices, through the instruments of tax competition, have threatened the economic, social, and tax stability of individual countries for more than two decades. The paper shows that developed countries have managed, to a certain extent, to gain control over their application by introducing more aggressive tax audits of transfer pricing. However, special attention is paid to developing countries which remain an active source of tax competition instruments abuse through the inadequate application of transfer pricing, due to the lack of adequate regulatory and control mechanisms, financial and human resources, and efforts to attract foreign investment through various instruments of tax competition.

scholarly journals IPTEKS PENGHITUNGAN HARGA TRANSFER DAN HARGA JUAL PADA RUMAH MAKAN KHOPINOS

2019 ◽  
Vol 3 (01) ◽  
Author(s):  
Novi Swandari Budiarso ◽  
Winston Pontoh
Keyword(s):  
Transfer Pricing ◽  
Transfer Price ◽  
Selling Price ◽  
Operating Profit ◽  
Transfer Prices ◽  
Medium Enterprise ◽  
The Right ◽  
Medium Businesses ◽  
The Cost

Determination of transfer prices and selling prices is not only a matter of large companies. This problem can occur in a type of Small and medium enterprise. But sometimes managers from small and medium businesses do not realize that in their business there is a transfer price transaction that can affect the selling price of the product to external consumers and subsequently affect operating profit. In order to overcome this problem, you can use the transfer pricing method and selling price so that you get the right transfer price and selling price for a business. The results of the transfer price calculation using the cost method and the selling price using the full cost method, the results of the transfer of semi-finished products from the preparation business unit are Rp. 4,900 / unit, while the selling price of the settlement division to external consumers is Rp. 11,020 / unit .Keywords : transfer price, selling price, cost based transfer price, market based transfer price, negotiated transfer price.

Dynamic transfer pricing under conditions of uncertainty – the use of real options

2019 ◽  
Vol 15 (4) ◽  
pp. 535-556 ◽  
Author(s):  
Jan M. Smolarski ◽  
Neil Wilner ◽  
Jose G. Vega
Keyword(s):  
Real Options ◽  
Transfer Pricing ◽  
Business Environment ◽  
Transfer Price ◽  
Operating Conditions ◽  
Options Pricing ◽  
Content Type ◽  
Pricing Mechanism ◽  
Managerial Flexibility ◽  
Transfer Prices

Purpose This paper aims to examine the applicability of real options methodology with respect to developing internal transfer pricing mechanisms. A pervasive theme in existing models is their inability to handle the dynamic and volatile nature of today’s business environment, as well as their lack of objective managerial flexibility. The authors address these and other issues and develop a transfer pricing mechanism based on Black–Scholes and the binomial options pricing methodology, which is better suited in today’s dynamic business environment. Design/methodology/approach The authors use a conceptual approach in developing theoretical justifications and show, practically, how a transfer price can be developed using two different real options pricing models. Findings The authors find that real options transfer price mechanism (real options framework [ROF]) can effectively deal with many of the issues that permeate a modern organization with complex multi-dimensional operations. The authors argue that uncertainty and behavioral issues commonly associated with setting transfer prices are better handled using a transfer pricing mechanism that preserves flexibility at the business unit level, the managerial level and the firm level. The approach allows for different managerial styles in both centralized and decentralized sub-units within the same organization. The authors argue that an open multi-dimensional framework using real options is suitable under conditions of uncertainty and managerial opportunism. Practical implications ROF-based transfer pricing may be significant in that firms can use it as a tool to manage an organization by setting the prices centrally and at the same time allowing managers to select the transfer price that best suits their specific situation and operating conditions. This may result in a more efficient and more profitable organization. Originality/value The contribution of the paper is the melding of the ROF from the finance literature with the accounting problem of setting a transfer price for items lacking a competitive market price. The authors also contribute to existing research by explicitly developing a framework that values managerial flexibility, takes into account uncertainty and considers the behavioral aspects of the transfer pricing process. The authors establish the conditions under which a generic real options model is a feasible alternative in determining a transfer price.

scholarly journals Analisis Implementasi Kebijakan Harga Transfer Pada CV ABC Yogyakarta

2020 ◽  
Vol 16 (1) ◽  
pp. 90-103
Author(s):  
Tatik
Keyword(s):  
Transfer Pricing ◽  
Market Price ◽  
Qualitative Approach ◽  
Primary Data ◽  
Case Study Method ◽  
External Market ◽  
Market Prices ◽  
Contribution Margin ◽  
Transfer Prices

This study aims to analyze the implementation of transfer pricing policies on CV ABC Yogyakarta. This research uses a qualitative approach with a case study method. The data used are primary data sourced from direct observation, and documentation of financial records. The results showed the transfer price set by the company using the market price method. Market prices are considered an appropriate method of determining transfer prices because products transferred between divisions are in the external market as well. However, in the calculation of the contribution margin of the Division that transfers the product it needs to be re-evaluated. Overheads have not yet been calculated in calculating the contribution margin.

scholarly journals Transfer Pricing: Impact of Taxes and Tariffs in India

2012 ◽  
Vol 37 (4) ◽  
pp. 29-46
Author(s):  
Pradeep Gupta
Keyword(s):  
Multinational Corporations ◽  
Home Country ◽  
Transfer Pricing ◽  
Transfer Price ◽  
Corporate Taxes ◽  
Tax Rates ◽  
Corporate Tax ◽  
Policy Makers ◽  
Corporate Tax Rates ◽  
Transfer Prices

Transfer pricing in an economy is very significant to corporate policy makers, economic policy makers, tax authorities, and regulatory authorities. Transfer pricing manipulation (fixing transfer prices on non-market basis as against arm's length standard) reduces the total quantum of organization's tax liability by shifting accounting profits from high tax to low tax jurisdictions. It changes the relative tax burden of the multinational firms in different countries of their operations and reduces worldwide tax payments of the firm. This paper explores the influence of corporate taxes and product tariffs on reported transfer pricing of Multinational Corporations (MNCs) in India by using the Swenson (2000) model. This study of custom values of import originating from China, France, Germany, Italy, Japan, Singapore, Switzerland, UK, and USA into India reveals that transfer pricing incentives generated by corporate taxes and tariffs provide opportunity for MNCs to manipulate transfer price to maximize profits across world-wide locations of operations and reduce tax liability. The main findings of this paper are: The estimates computed by grouping together products of all industries being imported into India from sample countries reveal that TPI coefficients are positive and significant. Overall, positive and significant coefficients of TPI predict that one per cent reduction in corporate tax rates in the home country of the MNC would cause multinational corporations with affiliated transactions to increase reported transfer prices in the range of 0.248 per cent to 0.389 per cent. The Generalized Least Square estimates for individual industries display that out of nine industries in the sample, three industries (38, 73, and 84) have a positive and significant co-movement with transfer pricing incentives. In four industries (56, 83, 85, and 90), coefficient of Transfer Pricing Incentive (TPI) is negative but significant. In case of two industries (39 and 82), TPI coefficient is negative but not significant. Positive and significant coefficients of TPI predict that one per cent reduction in corporate tax rates in the home country would cause multinational corporations with affiliated transactions to increase reported transfer prices by 1.20 per cent in ‘Miscellaneous Chemical Products’ Industry (Industry 38), 0.175 per cent in the ‘Articles of Iron or Steel’ Industry (Industry 73) and 0.908 per cent in �Nuclear Reactors, Boilers, Machinery and Mechanical Appliances; Parts thereof' Industry (Industry 84). In industries where coefficient of TPI is negative and significant, MNCs would like to shift the taxable income of their affilates to the host country by decreasing their reported transfer price. The government's approach should be to reduce corporate tax and tariff rates to bring them at a level comparable with countries across the world which will reduce incentives for the MNCs for shifting of income out of India and increase the tax base for tax authorities. This will also result in an increase in the tax revenue of the country.

Tax and Incentive Trade-Offs in Multinational Transfer Pricing

2002 ◽  
Vol 17 (3) ◽  
pp. 209-236 ◽  
Author(s):  
Michael Smith
Keyword(s):  
Performance Measures ◽  
Transfer Pricing ◽  
Managerial Incentives ◽  
Transfer Price ◽  
Tax Rate ◽  
Ex Post ◽  
Trade Offs ◽  
Pricing Rules ◽  
Ex Ante ◽  
Transfer Prices

Multinationals use transfer prices both for tax minimization and for managerial incentives. This paper analyzes two methods of disentangling the tax and incentive roles: setting multiple prices and using performance measures independent of transfer prices. Even with imperfect enforcement of transfer-pricing rules, regulator scrutiny limits the firm's flexibility. Transfer prices affect after-tax income both by influencing the manager's production decisions ex ante and by allocating income ex post across tax jurisdictions. If the ex ante incentive role dominates the ex post tax role, the firm increases the transfer price received by the subsidiary even if the subsidiary tax rate increases.

Sign in / Sign up

Export Citation Format

Share Document