Study On Transfer Pricing Strategy Under The Consideration Of Corporate Goal Optimization

Transfer pricing system has become a realistic and acute problem, companying with decentralization and profit centers occured in a firm, as well as diversification of organization form. It is always described as a tool for transfer pricing to coordinate decentralization and firm with multidivisions. However, the success of decentralization strictly depends on the correct pricing system. The role of transfer price is to provide price for intermediate goods and service, moreover, promote trade among profit centers in one company or group. For multinational enterprise, it also pays more attention to the importance of tax minimization and tax compliance. It has been believed for long time that transfer pricing is means of management and control in decentralized company. So researchers focus on this issue, which argued strongly throughout the practical and theoretical circle.Being a management and control tool, transfer pricing serves for the corporate goal, In the dissertation, a path of transfer pricing decision will be constructed to realize it. According to the situation of outside market or market structure, by virtue of some factors influenced by transfer pricing, such as resource allocation, taxation minimization, earning management, minority equity, market strategy, then we can reach goals as follows, profit maximization, subdivision profit target, tax compliant, revenue maximization (market shares), etc. What we will study is which strategy should be taken advantage of to realize the above objects simultaneously, meaning tradeoff or profit satisficing. An excellent system should satisfy several requirements, goal congruence, profit evaluation and subdivision autonomy. In addition, it is convenient to use in practice.Accountants, managerialist and economists all focus on transfer pricing problem, and try many methods to acquire or approach an optimal solution. In this paper, we comprises the research methods, quantitative analysis and qualitative analysis, as well as theoretical discussion and practical application. There are some typical ways as follows, references analysis method, collecting, identifying, arranging, analyzing and researching papers inside and outside countries; mathematical model; analytical research; case study, et al.A path of pricing decision has been setup, considering outside market or market structure of transfers and organization form, each goal will be realized via factors transfer pricing can influence. The corporate goal, profit satisficing, then achieve. Four issues, decision making under monopsony power, opportunity cost of intermediate goods without external market, discount based on market price under imperfect market, achieving a compromise of multiobjectives, will be presented and solved depending on above path.(1) When market of intermediate goods being incomplete, such as monopsony power, downstream division purchases it both from internal and external. Then, how to make decisions about the quantity and price of transferring and buying in order to reach corporate goal. Taking single company, having two profit centers, for example to illustrate theprocess.The marginal analysis technique is used to find the quantity downstream needs and its corresponding price, as well as transaction quantity purchased both from internal and external traders. Only in this way can a firm get the highest benefit with the lowest cost. Furthermore, the character of transfer pricing both under monopoly power and monopsony power was discussed, analyzed and compared. During the study, there are some following shortages. Firstly, moral hazard and investment hold-up is ignored because of complete and symmetric information hypothesis in advance. Secondly, it is conflict with decentralization conception when headquarter interferes in pricing decision, followed with autonomy weakened. Finally, the competition between upstream and outside market doesn’t considered.(2) The opportunity cost of intermediate product without outside market is taken into accountant. This problem, divided to two kinds of situations, could be solved by linear programming technique. The one is that opportunity cost of intermediate be used by this final good not others, all with external price. Another is that opportunity cost of raw materials be used by this intermediate good without market price not the other one having it.Opportunity cost could be decided based on shadow price calculated by linear programming. Then, it is possible that transfer pricing decision having considered opportunity cost could result in profit maximization. For sake of controlling the bound of transfer prices, sensitivity analysis about shadow price will be undertaken. In this way can allowable changeable interval of earning factor and resource constraint be judged while transfer price keeping unchanged. The shortcomings about analysis are as follows. Firstly, the suitability of opportunity cost must continue to watch because it is always changing accompanied with shadow price. Secondly, some hypothesis should be set up, including given and static demand curve, linear cost function, as well as substitution usage and earning capability ex ante estimation. Finally, system design doesn’t put the asymmetric information between headquarter and profit centers into consideration, so nor does goal mcongruence. (3) Pricing strategy of transfer in incomplete market, internal discount based on market, is presented. Whether profit can be increased, even maximized, depending upon interior discount based on external market price. Problem is discussed from two procedures in sequence:(1) whether interior transaction is influenced by discount;(2) whether or not the sale quantity and final price resulted from discount rule can maximize the total profit achieved by the firm as a whole.Research result is a intrafirm price, market price less suitable discount, could alleviate the weakness brought by marginal pricing method and double-marginalization problem. Cost difference between interior and exterior trade has infection to the discount which can achieve the optimization of resource allocation. The weakness is described below. Firstly, competition or substitution between downstream and outside purchaser in the final product market is ignored. Secondly, it is hard to infer the price elastic of demand if the state parameterized division’s earning and cost function is multidimensional. Finally, the cost in the model excludes the agent cost because of ignoring the moral hazard.(4) How to make decision when multiple and conflict objectives influenced by much more factors can achieve simultaneously. Taking complete factors into accountant, analyzing comprehensive role about several subgoals, pricing strategy obtained by virtue of project programming method realizes multigoals effectively.Taking a multinational enterprise located in Shenzhen for example. Mulitgoals are introduced according to business environment, the sequence of them is also considered. Project programming model of transfer pricing is set up and satisfying solution about those subgoals is resolved. It is feasible that the corporate goal can fully be achieved with above method. There are some shortages in study,(1) many given prerequisite, such as tax rate in different countries (districts), import duty rate, cost function and quantity, risk lost, market price;(2) autonomy damage. It seems that the only thing department managers can do is negotiating profit plan and weights with headquarters;(3) doubt validity. Generally, management is unable to construct pricing model as a result of lacking relative knowledge and technique. At the same time, selfish divisions acting in favour of their benefits hide information so that other centers have not complete and precise information, which infect practice application naturally.In addition, some limits exist in this paper. The hypothesis about return to scale is always constant, letting alone increasing or decreasing. The motivation that purchase or sell division, making decision freely, perhaps prefers to cooperate with outside dealer is neglected. There are two good reasons for taking exterior firms precedence over interior transaction. One is external partner may provide more satisfying service or better cooperation. Another’is that interior competition always exists in a decentralized firm. Whatever, headquarters should consider the intense political tint that acts on transfer pricing. So, it is not guaranteed that division volunteers to trade with other one when resource is idle.For long time, accounting theoretical and practical circle advocates transfer price is a management and control tool wildly used in decentralized company and concerned by researchers from extensive background. So far, there doesn’t exist a principle by which firm can make the most appropriate transfer pricing decision in all surroundings. Never have a method been perfectly sound. It is necessary to continue studying on transfer pricing for its well known difficulty.