The optimal focus of transfer prices: pre-tax profitability versus tax minimization

Jan Thomas Martini ()
Additional contact information
Jan Thomas Martini: Bielefeld University

Review of Accounting Studies, 2015, vol. 20, issue 2, No 9, 866-898

Abstract: Abstract This paper studies transfer prices influencing managerial decisions and determining corporate taxes in a multinational firm. Common sense suggests that the transfer price decision should be made to maximize the firm’s after-tax profit and thus achieve the optimal trade-off between pre-tax profitability and tax minimization. Based on a model of a decentralized firm facing asymmetric information with respect to operations, I examine why this conclusion does not hold in general. In particular, I demonstrate that a policy of negotiated transfer pricing, under which the divisions exploit their superior information but select the transfer price to maximize the firm’s pre-tax profit, is the firm’s optimal organizational choice if the high-tax division’s productivity is high. With respect to the firm’s discretion over the transfer price, I identify situations where the firm’s optimal policy choice does not depend on the arm’s length range and where less discretion increases the firm’s profitability.

Keywords: Transfer pricing; Multinational firm; Taxation; Decentralization; Management control (search for similar items in EconPapers)
JEL-codes: D82 H25 H32 L23 M41 (search for similar items in EconPapers)
Date: 2015
References: Add references at CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s11142-015-9321-3 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:reaccs:v:20:y:2015:i:2:d:10.1007_s11142-015-9321-3

Ordering information: This journal article can be ordered from
http://www.springer.com/accounting/journal/11142

DOI: 10.1007/s11142-015-9321-3

Access Statistics for this article

Review of Accounting Studies is currently edited by Paul Fischer

More articles in Review of Accounting Studies from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().