15 Pages Posted: 6 Jan 2013
Date Written: December 2, 2012
The main focus of this paper is on the international transfer pricing issues encountered by multinational enterprises (MNE) and the countries they do business in. This paper explores how the conflicting interests of MNEs and the countries they do business in affects each party’s bottom line, tax planning opportunities, personnel, and ethics. The transfer price is the price an organization must pay to transfer goods from one subsidiary or internal branch to another segment of the same organization. This paper covers five of the most commonly used transfer pricing methods and discusses how each method affects both the MNE and the countries differently. This paper also reveals tax planning strategies that are used when applying the transfer pricing rules. Tax planning strategies using transfer pricing are centered on expensing the high cost of goods and services in countries with the highest tax and expensing the low cost of goods and services in countries with the lowest tax to generate the highest overall after-tax profit for companies and their shareholders. Regarding personnel, transfer prices should have the following properties: “they should promote goal congruence; be useful for evaluating subunit performance; motivate management effort; and preserve a high level of subunit autonomy in decision-making” (Horngren, Datar & Foster, 2003, p. 215). This paper also addresses dual pricing, which happens when a MNE “uses one price to determine personnel bonuses and uses another price to minimize taxes” (McGee, 2010, p. 10). Lastly, this paper covers the ethical issues centered on transfer pricing. It addresses whether or not it’s ethical for MNEs to pay a significantly lower tax bill or in some cases, no tax bill at all while making large profits in their business.
Keywords: corporate taxation, decentralization, ethics, international business, multinational, responsibility centers, transfer pricing
JEL Classification: D01, F23, H21, H25, H73, H87, K34, L11, L14, L2, M4
Suggested Citation: Suggested Citation