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On Transfer Pricing: Conceptual Thoughts on the Nature of the Multinational Firm

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Author Info
Brem Markus
Tucha Thomas
Abstract

This paper deploys Transaction Cost Economics (TCE) to elaborate on the shortcomings of “mainstream” transfer pricing in multinational firms. Departing from the notion that multinationals increasingly (re-)organize their business along multinational value chains irrespective of jurisdictional borders, the paper discusses the nature of the multinational firm and the problem of choosing the right intra-group (transfer) price. The mainstream transfer pricing approach derived from the Arm?s Length Principle is deemed inappropriate for globalized MNEs. Referring to the value chain model, the paper suggests that “entrepreneurial coordination” is the key performance feature to be used for valuing business activity and for allocating – for tax transfer pricing purposes – standard markups and residual profits along the value chain.

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Paper provided by Indian Institute of Management Ahmedabad, Research and Publication Department in its series IIMA Working Papers with number 2005-11-03.

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Date of creation: 14 Nov 2005
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Handle: RePEc:iim:iimawp:2005-11-03

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Related research
Keywords: transfer pricing; value chain; transaction costs; multinational organization; entrepreneurial coordination;

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Find related papers by JEL classification:
F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Guttorm Schjelderup & Lars Sorgard, 1997. "Transfer Pricing as a Strategic Device for Decentralized Multinationals," International Tax and Public Finance, Springer, vol. 4(3), pages 277-290, July. [Downloadable!] (restricted)
  2. Robert F. Göx & Jens Robert Schöndube, 2004. "Strategic Transfer Pricing With Risk-Averse Agents," Schmalenbach Business Review (sbr), LMU Munich School of Management, vol. 56(2), pages 98-118, April. [Downloadable!]
  3. Giovanni Dosi & Franco Malerba, 2002. "Interpreting industrial dynamics twenty years after Nelson and Winter's Evolutionary Theory of Economic Change: a preface," Industrial and Corporate Change, Oxford University Press, vol. 11(4), pages 619-622, August.
  4. Dirk Sliwka, 2002. "On the Use of Nonfinancial Performance Measures in Management Compensation," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 11(3), pages 487-511, 09. [Downloadable!] (restricted)
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  5. Lambert, Richard A., 2001. "Contracting theory and accounting," Journal of Accounting and Economics, Elsevier, vol. 32(1-3), pages 3-87, December. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Brem Markus, 2005. "Globalization, Multinationals and Tax Base Allocation: Advance Pricing Agreements as Shifts in International Taxation?," IIMA Working Papers 2005-12-01, Indian Institute of Management Ahmedabad, Research and Publication Department. [Downloadable!]
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