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

• Autores: Jan Thomas Martini
• Localización: Review of Accounting Studies, ISSN-e 1573-7136, Vol. 20, Nº. 2, 2015, págs. 866-898
• Idioma: inglés
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• Resumen

  • 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.