International Transfer Pricing Policy in US and German Subsidiaries

Abstract

International transfer prices (ITP) policies affect economic decisions and corporate performance. It is a long held belief that multinational companies use ITP to minimize global tax liability. From this point of view, this is an administrative process but the strategy is also as a major determinant of the ITP policy (Eccles, 1985). This paper analyzes the determinants of the ITP policy in American and German subsidiaries operating in Portugal based on their responses to a questionnaire.

The study analyses the methods used by these companies to determine the ITP, the level of participation of local managers in defining this policy and the association of these methods with the objectives of the ITP policy. It also analyses the determinants of the ITP policy and its effect on the performance of the subsidiary.

Previous research analyzed the ITP policy of American, British, Canadian or Japanese companies while this research is a comparative study. Other issue commonly discussed in the literature is the effect of the ITP policy on the subsidiary's profitability and this study tests statistically this effect. Another contribution is the confrontation of the controllers' perceptions of the effect of the ITP policy on the subsidiaries' profitability with accounting data.

The study confirms the importance of the strategy and the diversity of methods for determining the transfer prices. As a consequence, the OECD arm's length principle is clearly a constraint to actual practices.

Keywords: International Transfer Pricing, Multinational Management

JEL Classification: F23, L19, H25, M40, M46, M47