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The Need For Working Capital Adjustments In A Transfer Pricing

Listed author(s):
  • Jamal Hejazi

    (Gowling Lafleur Henderson)

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.

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Paper provided by EconWPA in its series Microeconomics with number 0508009.

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Length: 6 pages
Date of creation: 24 Aug 2005
Handle: RePEc:wpa:wuwpmi:0508009
Note: Type of Document - doc; pages: 6
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