Determining intra-company transfer pricing for multinational corporations

Lu Gao and Xuan Zhao

International Journal of Production Economics, 2015, vol. 168, issue C, 340-350

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.

Keywords: Transfer price; Profit maximization; Currency; Exchange rate uncertainty; Multinational corporation; Global supply chain (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (14)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:proeco:v:168:y:2015:i:c:p:340-350

DOI: 10.1016/j.ijpe.2015.07.006

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