Transfer Pricing: Use The Internet And Strayer Library To Re

Transfer Pricinguse The Internet Andor Strayer Library To Research T

Transfer Pricing" Use the Internet and/or Strayer Library to research transfer pricing problems and issues of multinational companies. According to the text, the possible methods for determining transfer pricing of goods between divisions are negotiated transfer prices, cost-based transfer prices, and market-based transfer prices. Assess the major potential problems that a multinational firm could encounter when using negotiated transfer pricing instead of market-based transfer pricing. Provide one (1) recommendation to the firm on how to avoid these problems.

Paper For Above instruction

Transfer pricing is a critical aspect of multinational corporations’ (MNCs) operational and financial strategies. It involves determining the prices at which goods, services, or intangible assets are transferred between divisions or subsidiaries of the same enterprise. The method chosen for transfer pricing has significant implications for tax liability, profit allocation, and compliance with international tax regulations. Among the various methods, negotiated transfer pricing and market-based transfer pricing are common, each with distinct advantages and challenges. This paper evaluates the potential issues associated with using negotiated transfer pricing instead of market-based transfer pricing and offers strategic recommendations to mitigate these challenges.

Negotiated transfer pricing refers to the internal agreement between divisions or subsidiaries, often influenced by bargaining power, negotiation skills, or internal policies. Conversely, market-based transfer pricing uses external market prices as benchmarks, reflecting what unrelated parties would agree upon in a free market scenario (OECD, 2017). While negotiated prices offer flexibility and internal strategic advantage, they can also give rise to significant problems, especially when used in place of market-based pricing.

One of the primary issues with negotiated transfer pricing is the risk of tax manipulation and compliance challenges. Multinational firms may intentionally set transfer prices that shift profits from high-tax jurisdictions to low-tax jurisdictions, thus minimizing overall tax liability (Harrington et al., 2018). When pricing is negotiated internally without reference to external market prices, tax authorities may scrutinize such arrangements, potentially leading to audits, penalties, or double taxation. Furthermore, negotiated prices can be subjective, leading to inconsistencies and disputes between divisions or with tax authorities.

Another potential problem is the distortion of profitability and performance measurement. Negotiated prices may not accurately reflect the economic value of goods or services, leading to distorted division performance assessments (Vann et al., 2019). This distortion can impact managerial incentives, leading divisions to prioritize internal negotiations over efficiency or market realities, thereby undermining overall corporate strategy. Additionally, negotiation impasses or disagreements may delay transactions, disrupting supply chains or operational efficiency.

A further challenge involves resource allocation and investment decisions. When internal transfer prices are manipulated for tax or strategic purposes, divisions may avoid necessary investments or over-invest in certain activities to influence transfer prices (Crane & Tandberg, 2020). This behavior hampers optimal resource allocation and can hinder long-term value creation for the firm.

Addressing these problems requires the adoption of strategies that promote transparency, alignment with market realities, and compliance with international standards. One effective recommendation is the implementation of an arm's length price policy, which mandates that negotiated transfer prices should, wherever possible, approximate market prices. This can be achieved by utilizing external market data, comparable uncontrolled prices, or valuation methods consistent with International Financial Reporting Standards (IFRS) or OECD guidelines (OECD, 2017). Establishing clear transfer pricing documentation and employing advanced transfer pricing analysis tools can further reduce ambiguity and disputes between divisions and tax authorities.

In conclusion, while negotiated transfer prices provide flexibility in managing intra-company transactions, they pose significant risks related to tax compliance, profit distortion, and resource misallocation. By aligning internal transfer prices with external market standards through comprehensive policies and documentation, multinational firms can mitigate these risks and maintain robust, compliant transfer pricing strategies.

References

• Crane, G., & Tandberg, D. (2020). Internal transfer pricing and resource allocation. Journal of International Business Studies, 51(2), 188-204.
• Harrington, B., Yip, F., & Murphy, R. (2018). Transfer pricing and tax avoidance: An empirical analysis. Tax Notes International, 92(8), 835–848.
• OECD. (2017). Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. Organisation for Economic Co-operation and Development.
• Vann, P., Rikhardsson, P., & Karstedt, C. (2019). Performance measurement in multinational companies: The challenges of negotiated transfer prices. Management Accounting Research, 45, 100700.