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Determining intra-company transfer pricing for multinational corporations

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  • Gao, Lu
  • Zhao, Xuan

Abstract

Although significant attention has been paid to transfer pricing — the pricing of intermediate products sold between different divisions within one company — the focus has been limited to tax minimization within regulatory boundaries. This paper presents a comprehensive model that aims to determine the optimal transfer price for a multinational corporation (MNC) to maximize the entire organization׳s profit. The model considers the situation in which intermediate products are sold from the MNC׳s selling divisions to buying divisions; the buying divisions further process these intermediate products to produce final products; the final products are then sold in both selling-divisions and buying-divisions across the MNC׳s global locations. In contrast to the existing literature, our innovative model incorporates elements such as international transportation costs, holding costs, taxes, tariffs (including the introduction of a second tariff), and exchange rates. This paper also provides managerial insights about the impact of setting transfer prices in different currencies on the variance of each division׳s profit given exchange rate uncertainty.

Suggested Citation

  • Gao, Lu & Zhao, Xuan, 2015. "Determining intra-company transfer pricing for multinational corporations," International Journal of Production Economics, Elsevier, vol. 168(C), pages 340-350.
    • Handle: RePEc:eee:proeco:v:168:y:2015:i:c:p:340-350
    DOI: 10.1016/j.ijpe.2015.07.006
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    Cited by:

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    2. Lioara-Veronica Pasc & Camelia-Daniela Hațegan, 2020. "Related Parties’ Transactions: A Literature Overview on Auditor’s Risk," Ovidius University Annals, Economic Sciences Series, Ovidius University of Constantza, Faculty of Economic Sciences, vol. 0(2), pages 1021-1030, December.
    3. Zhang, Wenyue & Li, Jianan & Sun, Chuanwang, 2022. "The impact of OFDI reverse technology spillovers on China's energy intensity: Analysis of provincial panel data," Energy Economics, Elsevier, vol. 116(C).
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    5. Ying Li & Ying Cheng, 2024. "A Risk Management Strategy under Transfer Pricing for Multi-National Supply Chain along the Belt and Road Initiative," Sustainability, MDPI, vol. 16(17), pages 1-24, September.
    6. Julio B. Clempner, 2018. "Strategic Manipulation Approach for Solving Negotiated Transfer Pricing Problem," Journal of Optimization Theory and Applications, Springer, vol. 178(1), pages 304-316, July.
    7. Ioana Ignat, 2019. "Transfer Pricing – An Analysis from the Romania`s Perspective," Ovidius University Annals, Economic Sciences Series, Ovidius University of Constantza, Faculty of Economic Sciences, vol. 0(2), pages 755-765, December.
    8. Cascavilla, Alessandro, 2023. "Negotiated transfer pricing and uncertain regulation: a simulated trust game approach," MPRA Paper 118703, University Library of Munich, Germany.
    9. Katalin Hartung, 2017. "Optimal Resource Allocation at the Blue Economy Type of Firms," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 16(3), pages 98-118.
    10. Julio B. Clempner & Alexander S. Poznyak, 2019. "Solving Transfer Pricing Involving Collaborative and Non-cooperative Equilibria in Nash and Stackelberg Games: Centralized–Decentralized Decision Making," Computational Economics, Springer;Society for Computational Economics, vol. 54(2), pages 477-505, August.
    11. Clempner, Julio B., 2020. "Penalizing passenger’s transfer time in computing airlines revenue," Omega, Elsevier, vol. 97(C).
    12. Lilia Grigoroi & Veronica Grosu & Anatol Melega, 2023. "Financial-Accounting Model For Transfer Pricing Based On Standardised Accounting Policies," European Journal of Accounting, Finance & Business, "Stefan cel Mare" University of Suceava, Romania - Faculty of Economics and Public Administration, West University of Timisoara, Romania - Faculty of Economics and Business Administration, vol. 11(1), pages 3-11, February.
    13. Mai, Nhat Chi, 2020. "The Effects Of The Base Erosion And Profit Shifting (Beps) Action 13 On Transfer Pricing Practices: A Comparative Empirical Study Of New Zealand And Vietnam," OSF Preprints gq27c, Center for Open Science.
    14. Sol Picciotto, . "International tax, regulatory arbitrage and the growth of transnational corporations," UNCTAD Transnational Corporations Journal, United Nations Conference on Trade and Development.

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