Discussion of ‘‘Divisional performance measurement
and transfer pricing for intangible assets’’
Published online: 19 May 2006
Springer Science+Business Media, LLC 2006
Abstract The conference paper by Johnson (2006, Review of Accounting Studies,
forthcoming) develops an incomplete-contracting transfer pricing model with a number of
novel features: taxation, sequential investments, and intangible assets being transferred.
This discussion aims to disentangle these features so as to highlight those that are the key
drivers of the results. Moreover, I show that some of the results can be generalized to
settings involving a greater level of technological interdependency between the divisions.
Keywords Transfer pricing Æ Intangibles Æ Taxation Æ Hold-up problem
JEL Classiﬁcations M41 Æ L22 Æ D23
Income taxes play an important role in ﬁrms’ decision-making. An extensive literature in
accounting and economics has looked at how taxes affect ﬁrms’ decisions regarding
location, the use of tax shelters, ﬁnancial reporting, etc. (Scholes, Wolfson, Erickson,
Maydew, & Shelvin, 2004). Most of this literature has been empirical in nature with the
exception of the analytical literature on transfer pricing for multinationals (MNEs).
Whenever companies transfer intermediate goods across divisions located in different tax
jurisdictions, transfer prices play a dual role of allocating taxable income and coordinating
the divisional manager’s decisions. The topic addressed in Johnson’s (2006) conference
paper—how to account internally for cross-jurisdictional transfers of intangible assets—is
important and timely. First, the recent Ernst and Young (2005) survey ranks transfer
pricing as the most important item on the agenda of corporate tax directors of MNEs.
Second, there has been a recent trend among ﬁrms towards ‘‘decoupling’’ of transfer prices
T. Baldenius (&)
Graduate School of Business, Columbia University, 3022 Broadway, New York, NY 10027, USA
Rev Acc Stud (2006) 11:367–376