Critical Concerns in Transfer Pricing and Practice

By Wagdy M. Abdallah | Go to book overview

3

Corporate Goals of Transfer Pricing Policies

This chapter examines the corporate goals or objectives of international transfer pricing policies and whether MNCs can achieve all or some of them simultaneously using the same transfer pricing system. It divides the corporate goals into internal and external sets. The external set of goals is analyzed first, and they include reducing income tax liability, tariffs, exchange rate risk, avoiding conflicts with host governments, cash flow management, and competition. Then the internal set of goals is discussed, and they include performance evaluation of foreign subsidiaries and their managers, motivation, and goal harmonization.

Over the years, transfer pricing of tangible and intangible goods has undeniably become a major international business issue of MNCs and a nightmare problem for CEOs. MNCs, in theory, have the ability to use their international transfer pricing policies to maximize their global profits. Practically, developing these policies is a most difficult and sophisticated pricing decision, one more complicated than developing domestic transfer pricing policies. An MNC has to manage its overseas production and marketing policies in a world characterized by different international tax rates, foreign exchange rates, governmental regulations, currency manipulation, and other economic and social problems. Such market characteristics create high transaction costs for an MNC when it uses its regular marketing policies. It is important for MNCs to create an internal market if they want to avoid these problems and any costs associated with them. Allocation of resources among domestic and foreign subsidiaries requires the central management of an MNC

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