Keeping Two Sets of Books: The Relationship Between Tax and Incentive Transfer Prices

Keeping Two Sets of Books: The Relationship Between Tax and Incentive Transfer Prices Multinational enterprises use two types of transfer prices: the tax transfer price to achieve optimal tax outcomes and the incentive transfer price to provide appropriate incentives to offshore managers. The two optimal transfer prices are independent if taxable income is assessed using the formula apportionment approach. Under the separate entity approach, however, they are interdependent: they both decrease as the penalty for noncompliance with the arm's length principle increases; and the tax transfer price decreases and the incentive transfer price increases as the marginal cost of production increases. We also examine the case where the incentive transfer price is negotiated rather than dictated by the parent. The results are robust to different market structures and tax environments. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Economics & Management Strategy Wiley

Keeping Two Sets of Books: The Relationship Between Tax and Incentive Transfer Prices

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Publisher
Wiley
Copyright
Copyright © 2005 Wiley Subscription Services, Inc., A Wiley Company
ISSN
1058-6407
eISSN
1530-9134
D.O.I.
10.1111/j.1430-9134.2005.00038.x
Publisher site
See Article on Publisher Site

Abstract

Multinational enterprises use two types of transfer prices: the tax transfer price to achieve optimal tax outcomes and the incentive transfer price to provide appropriate incentives to offshore managers. The two optimal transfer prices are independent if taxable income is assessed using the formula apportionment approach. Under the separate entity approach, however, they are interdependent: they both decrease as the penalty for noncompliance with the arm's length principle increases; and the tax transfer price decreases and the incentive transfer price increases as the marginal cost of production increases. We also examine the case where the incentive transfer price is negotiated rather than dictated by the parent. The results are robust to different market structures and tax environments.

Journal

Journal of Economics & Management StrategyWiley

Published: Mar 1, 2005

References

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