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Relationship-Specific Investments and the Transfer Pricing Paradox

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  • Richard Sansing

    (Tuck School of Business at Dartmouth)

Abstract

The revised Treasury Regulations interpreting Internal Revenue Code Section 482 allow the use of profit-based transfer pricing methods, as well as the older methods based on prices from comparable transactions between independent parties. This paper compares the effects of price-based and profit-based transfer pricing methods on the allocation of taxable income in a model in which organization structure affects the level of relationship-specific investments made by vertically integrated groups and comparable independent firms. Analysis of the model shows that the price-based methods systematically allocates more taxable income to foreign subsidiaries and less to domestic parents than does the profit-based method.

Suggested Citation

  • Richard Sansing, 1999. "Relationship-Specific Investments and the Transfer Pricing Paradox," Review of Accounting Studies, Springer, vol. 4(2), pages 119-134, June.
    • Handle: RePEc:spr:reaccs:v:4:y:1999:i:2:d:10.1023_a:1009601102396
    DOI: 10.1023/A:1009601102396
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    References listed on IDEAS

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    1. Shelanski, Howard A & Klein, Peter G, 1995. "Empirical Research in Transaction Cost Economics: A Review and Assessment," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 11(2), pages 335-361, October.
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    Cited by:

    1. Nicole Bastian Johnson, 2006. "Divisional performance measurement and transfer pricing for intangible assets," Review of Accounting Studies, Springer, vol. 11(2), pages 339-365, September.
    2. Jan Thomas Martini, 2015. "The optimal focus of transfer prices: pre-tax profitability versus tax minimization," Review of Accounting Studies, Springer, vol. 20(2), pages 866-898, June.

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