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Impact of taxation on international transfer pricing and offshoring decisions

Author

Listed:
  • Ziping Wang

    (Morgan State University)

  • Wenlian Gao

    (Central University of Finance and Economics)

  • Samar K. Mukhopadhyay

    (Sungkyunkwan University)

Abstract

A multinational company may move production to a foreign country to take advantage of low manufacturing cost, and/or experience tax savings. Transfer prices play an important and strategic role on income shifting by multinational companies. In this paper, we construct a framework for optimal decision making in global supply chains with uncertain and price-dependent demand, propose methods to improve global supply chain parties’ performance, and explore schemes to integrate global supply chains. The optimal pricing and offshoring decisions are investigated for different situations where the low foreign production cost and low foreign tax rate exist or only one of them is available. The case of low foreign tax rate without the advantage of low foreign production cost provides the most interesting findings that partial offshoring dominates when a certain threshold is met. In addition, the double marginalization is examined in decentralized global supply chains similar to the mechanism in newsvendor problems. Due to the existence of the tax jurisdiction, the double marginalization cannot be completely eliminated by coordinating schemes. Finally, the traditional buy back contract is found to be unable to coordinate global supply chains, while a modified sales sharing contract can improve the performance of the global supply chain.

Suggested Citation

  • Ziping Wang & Wenlian Gao & Samar K. Mukhopadhyay, 2016. "Impact of taxation on international transfer pricing and offshoring decisions," Annals of Operations Research, Springer, vol. 240(2), pages 683-707, May.
    • Handle: RePEc:spr:annopr:v:240:y:2016:i:2:d:10.1007_s10479-013-1489-y
    DOI: 10.1007/s10479-013-1489-y
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    Cited by:

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    6. da Silva Stefano, Gustavo & Antunes, Tiago dos Santos & Lacerda, Daniel Pacheco & Wolf Motta Morandi, Maria Isabel & Piran, Fabio Sartori, 2022. "The impacts of inventory in transfer pricing and net income: Differences between traditional accounting and throughput accounting," The British Accounting Review, Elsevier, vol. 54(2).
    7. Wu, Zhiqiao & Lu, Xiangyuan, 2018. "The effect of transfer pricing strategies on optimal control policies for a tax-efficient supply chain," Omega, Elsevier, vol. 80(C), pages 209-219.
    8. Javiera Barrera & Eduardo Moreno & Sebastián Varas K., 2020. "A decomposition algorithm for computing income taxes with pass-through entities and its application to the Chilean case," Annals of Operations Research, Springer, vol. 286(1), pages 545-557, March.

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