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Transfer Pricing – Business Incentives, International Taxation and Corporate Law

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  • Wolfgang Schoen
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    Abstract

    Transfer pricing is relevant in three different contexts: From a managerial perspective, intra-firm transfer prices are employed to set incentives for sub-divisional managers to enhance efficient allocation of resources. From an international tax perspective, transfer pricing rules under the arm's length standard serve as a means to allocate profits to corporate entities within a multinational enterprise and to allocate taxing rights to the involved jurisdictions. From a corporate law perspective, transfer prices within a group are controlled in order to avoid asset diversion by related-party transactions ("tunneling"). This article shows the interaction between these three perspectives. It pleads for a deviation from the arm's length standard: source countries should tax profits derived by local group companies under managerial transfer pricing and additionally tax rents derived by foreign companies from intra-firm intangibles and intra-firm specific investment. Corporate law requirements hardly pre-empt this shift away from the arm's length standard. Finally, this concept is applied to some widely discussed court cases on transfer pricing.

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    File URL: http://www.tax.mpg.de/RePEc/mpi/wpaper/Tax-MPG-RPS-2011-05.pdf
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    Bibliographic Info

    Paper provided by Max Planck Institute for Tax Law and Public Finance in its series Working Papers with number transfer_pricing.

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    Length: 19 pages
    Date of creation: Jan 2011
    Date of revision:
    Handle: RePEc:mpi:wpaper:transfer_pricing

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    Related research

    Keywords: Transfer Pricing; International Taxation; Related Party Transactions; Multinational Enterprises; Corporate Groups; Taxing Rights;

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