Tax and Incentive Trade-Offs in Multinational Transfer Pricing

• Autores: Michael Smith
• Localización: Journal of Accounting Auditing and Finance, ISSN-e 2160-4061, ISSN 0148-558X, Vol. 17, Nº 3, 2002, págs. 209-236
• Idioma: inglés
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• Resumen

  • Multinationals use transfer prices both for tax minimization and for managerial incentives. This paper analyzes two methods of disentangling the tax and incentive roles: setting multiple prices and using performance measures independent of transfer prices. Even with imperfect enforcement of transfer-pricing rules, regulator scrutiny limits the firm's flexibility. Transfer prices affect after-tax income both by influencing the manager's production decisions ex ante and by allocating income ex post across tax jurisdictions. If the ex ante incentive role dominates the ex post tax role, the firm increases the transfer price received by the subsidiary even if the subsidiary tax rate increases.