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The Need For Working Capital Adjustments In A Transfer Pricing

Author

Listed:
  • Jamal Hejazi

    (Gowling Lafleur Henderson)

Abstract

Transfer pricing involves the price that one member of a multinational organization charges another member operating in a different tax jurisdiction for goods, services or intangible property. Performing working capital adjustments are necessary to ensure that returns derived from a set of comparables can be reliably applied to a tested party operating in a non arm’s length setting. There is no theoretical argument that suggests that working capital adjustments should be rejected. The analysis has shown that operating in a perfectly competitive environment implies that working capital adjustments are a requirement. These findings are supported on theoretical grounds which are violated when different working capital intensities between firms exist. Given that firms are assumed to be price-takers, then the only way that prices charged by all firms can be a taken as given is if all of the factors that affect prices, including working capital intensities, are the same.

Suggested Citation

  • Jamal Hejazi, 2005. "The Need For Working Capital Adjustments In A Transfer Pricing," Microeconomics 0508009, EconWPA.
  • Handle: RePEc:wpa:wuwpmi:0508009
    Note: Type of Document - doc; pages: 6
    as

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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/mic/papers/0508/0508009.doc
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    More about this item

    Keywords

    transfer pricing; working capital adjustments;

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • D2 - Microeconomics - - Production and Organizations
    • D3 - Microeconomics - - Distribution
    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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