Transfer Pricing and the Decision-Making Authority of the Tax Function in Multinational Companies

53 Pages Posted: 14 Nov 2018 Last revised: 25 Oct 2019

See all articles by Sven-Eric Baersch

Sven-Eric Baersch

Flick Gocke Schaumburg

Jost H. Heckemeyer

University of Kiel - Faculty of Economics and Social Sciences; ZEW – Leibniz Centre for European Economic Research

Marcel Olbert

University of Mannheim - Business School

Date Written: May 20, 2019

Abstract

The allocation of decision rights is a fundamental issue of organizational design. We study the allocation of decision-making authority within firms’ transfer pricing function where tax and managerial objectives typically conflict. Exploring unique survey data, we investigate whether centralizing transfer pricing decision-making at the tax department is associated with a higher likelihood of (external) tax audit conflicts and (internal) coordination conflicts. We find that disputes with local tax authorities are more likely, and thus tax risk is higher, when the tax department has ultimate authority over transfer pricing decisions. This result is consistent with theory predicting that central tax managers focus on firm-wide profits instead of easing local tax audits of single subsidiaries. We find that internal coordination, on average, seems to be unaffected by the allocation of decision rights to the tax department. Yet, such centralized transfer pricing decision-making is associated with internal coordination conflicts when it is paired with less sophisticated tax planning strategies and when pricing intrafirm trade is more complex, i.e. when intrafirm trade involves services and intellectual property. Results of cross-sectional tests suggest that firms benefit from centralizing decision-making authority at the tax department in terms of lower tax risk and fewer coordination conflicts if firms employ sophisticated planning tax strategies.

Keywords: transfer pricing, decision-making, coordination, tax risk

Suggested Citation

Baersch, Sven-Eric and Heckemeyer, Jost H. and Olbert, Marcel, Transfer Pricing and the Decision-Making Authority of the Tax Function in Multinational Companies (May 20, 2019). Available at SSRN: https://ssrn.com/abstract=3271267 or http://dx.doi.org/10.2139/ssrn.3271267

Sven-Eric Baersch

Flick Gocke Schaumburg ( email )

Germany

Jost H. Heckemeyer

University of Kiel - Faculty of Economics and Social Sciences ( email )

Kiel
Germany

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Marcel Olbert (Contact Author)

University of Mannheim - Business School ( email )

Schloss Ostflügel
Mannheim, 68131
Germany

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