Transfer Pricing: Factors to Consider

• Published date: 01 September 2015
• Author: Robert Leitch,Caroline Strobel,Mark Cecchini
• Date: 01 September 2015
• DOI: http://doi.org/10.1002/jcaf.22076

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© 2015 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22076

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Transfer Pricing: Factors to Consider

Mark Cecchini, Robert Leitch, and Caroline Strobel

The modern busi-

ness world has

become a place

where not only our

largest corporations

operate and do busi-

ness in multiple coun-

tries, but relatively

small, closely held

corporations are also

venturing outside

their home‐country

boundaries. They are

able to accomplish

this because trade

barriers continue to

fall and the world has become a

smaller place due to technology

advancements.

Multinational enterprises

(MNEs) by their very nature

have advantages and disadvan-

tages. A major advantage (and

thus major motivation) is that

operating in other countries

provides the ability to take

advantage of market imperfec-

tions and thus gain a competi-

tive advantage. Whether a large

MNE or small, closely held

business, the use oftransfer

pricing is necessary to appro-

priately manage costs and risks.

Two economic theories

describe how divisions in an

MNE interact with each other:

transaction cost economics

(TCE) and the resource‐based

view (RBV). Both theories are

relevant to determining trans-

fer prices between divisions of

an MNE. The theories focus

on the coordination of activi-

ties at the boundary between

entities making up the MNE

and consider the effects of the

nature of the value chain, mar-

kets, and environmental factors

including taxes and regulations,

power and dependency, and

governance structures on deter-

mining an appropriate transfer

price. In MNEs, entities in the

internal value chain may be

located domestically as well as

internationally. Anexample of

this is the movement of com-

panies within the United States

from one state to another

in order to obtain operating

conditions that will

help to maximize

profits and to grow

the business. Divi-

sions within these

companies transfer

products across

state lines (separate

tax jurisdictions)

among themselves.

We can contrast this

situation with large

MNEs that oper-

ate in many foreign

countries and have

multiple lines of

business operated by a number

of different divisions. In these

widely diverse situations, the

entities will be using transfer

pricing. This article discusses

briefly these two important

economic theories, TCE and

RBV, and how they influence

transfer pricing and its impact

on MNEs.

RESOURCE‐BASED VIEW

The resource‐based view

ofa firm focuses on the stra-

tegic benefits of cooperation

among the different organi-

zational entities that make up

that firm. The resources needed

to conceive, choose, and imple-

ment strategies are likely to be

heterogeneously distributed

This article considers the many factors that must

go into developing a transfer price to be used as

products and services move between entities and

divisions of multinational enterprises (MNEs). The

discussion focuses on two different economic

theories: resource‐based value and transaction

cost economics. These two theories are integrated

to better understand the multitude of factors that

must be considered in developing a transfer price.

The use of a well‐thought‐out transfer price has a

positive effect on the value of a firm.

© 2015 Wiley Periodicals, Inc.