Lenzini Steel: The Impact of Transfer Pricing and Taxes on Global Operations

Abstract

The Lenzini Steel case extends the classic cost/managerial accounting treatment of transfer pricing to include a wider range of inter-company transactions (ICTs): (1) product sales (traditional setting), (2) royalty payments for intellectual property, (3) machine acquisition and management fees, and (4) working capital loans. As described by Ernst & Young (2010), transfer pricing is one of the most important issues facing multinational companies today, and its relevance is increasing. Yet transfer pricing often remains essentially under-taught in junior, senior and masters-level accounting classrooms. Faculty need new teaching materials that reflect the increasing complexity associated with transfer pricing. We wrote the case to begin filling the void.

In this case, students must integrate concepts from three accounting disciplines: cost/managerial accounting, financial reporting (through an auditor’s view), and tax accounting. More importantly, however, students are asked to exercise their critical thinking skills by evaluating the four ITCs and establishing a defensible transfer pricing range for each. The Institute of Management Accountants (IMA 2013) and the American Institute of Certified Public Accountants (2005) have emphasized critical (or strategic) thinking skills as a key competency for accounting professionals. Based upon their analyses, students must use their critical thinking skills to assess the defense-ability of each ITC in terms of FIN 48 (codified as ASC 740-10), and recommend a reserve for uncertain tax positions that should be recorded in Lenzini’s financial statements. The case requires students to travel from the more familiar (establishing a transfer price for different inter-company transactions) to the less familiar (predicting who benefits and who suffers from the student’s transfer pricing decision), while considering an environment where division managers act in their own self-interest. As the final case requirement, students must develop the talking points they will use to convince company management to record the reserve and reduce net income, analyze which of the CFOs (1 corporate-level and 3 division-level) will push back, and anticipate the counter-arguments the CFOs might use.

Keywords: Transfer pricing, International tax, FIN 48, critical thinking

JEL Classification: M41, J18, K34, O57