A comparative investigation of transfer pricing practices in an international environment

This study investigates the international transfer pricing practices of publicly-held, U.S.-based multinational firms. While previous research has focused on the transfer pricing method employed by firms, this study concentrates on the objectives of the transfer pricing policy. Objectives were identified by questionnaires completed by sample firms. The primary objectives examined comprise three major categories: (1) management of income taxes; (2) achieving a competitive position; and (3) facilitating equitable performance evaluation, motivation of managers, and goal congruence between the goals of managers and the goals of the firm. Situational determinants were then created from questionnaire responses and financial data. Various models were constructed to ascertain if specific situational determinants were useful in explaining the financial statement results of these strategies. For taxation and competitive position objectives, the dollar volume of transfers and the number of countries where the multinational firm operates were consistently significant explanatory variables of financial statement effects. Situational determinants were not useful in explaining internal dimension objectives of transfer pricing. Overall, this study does conclude that multinational firms in the sample do concurrently pursue multiple objectives in their transfer pricing strategy.