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Financial Control and Transfer Pricing

In: Encyclopedia of Finance

Author

Listed:
  • Savita A. Sahay

    (Rutgers University)

Abstract

This chapter intends to explore transfer pricing and some popular transfer pricing methods. Since transfer prices are used to assess the incomes of the firm’s divisions, choice of a transfer pricing policy can influence many important operational and strategic decisions, such as capital and resource allocation, volume and efficiency of production, performance evaluation as well as tax planning. We use a descriptive method to study and compare the most popular transfer pricing policies used in American industry and find that many transfer pricing policies may lead to sub-optimal decisions and conflicts within the company because of the incentives they create for managers. For the purpose of optimal decision making in a multi divisional form, Actual cost-based transfer pricing with an additive markup has been shown to dominate an entire class of alternative policies. In multinational corporations, there is an incentive to reduce the overall income tax burden by charging higher prices to units located in countries with high tax rates. This chapter also explores the economic incentives for the use of a particular transfer pricing policy by multinational companies.

Suggested Citation

  • Savita A. Sahay, 2022. "Financial Control and Transfer Pricing," Springer Books, in: Cheng-Few Lee & Alice C. Lee (ed.), Encyclopedia of Finance, edition 0, chapter 67, pages 1541-1561, Springer.
    • Handle: RePEc:spr:sprchp:978-3-030-91231-4_67
    DOI: 10.1007/978-3-030-91231-4_67
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