Multinational Transfer Pricing: A management systems framework

An all inclusive and systematic approach to Multinational Transfer Pricing (MNTP) has not been developed. There has been a suggested link between strategy and choice of transfer pricing method. This relationship, however, has not been tested or verified in Multinational situations. Strategic attractiveness of a foreign market as defined by real growth in market share is used as the primary independent variable in determining the choice of transfer pricing method utilized by Multinational Corporations. A form of Cost Method is expected for strategically attractive markets and a form of Market Method is anticipated for the less attractive markets.;A clinical field research methodology is followed using a nested hierarchical expert sampling technique. Twenty-six business units of fifteen Multinational Corporations involved in a MNTP scheme participated in the study. Forty-six percent of the sampled companies were selected from the global electrical/electronic industry with the world market leaders participating.;Descriptive statistics, case studies, executive decision making patterns and spreadsheet analysis are used to evaluate the findings. A comprehensive and systematic decision model is developed which explains and integrates the various factors executives consider in the formulation of a MNTP Policy. The model is justified from the research and was verified with two thirds of the participating corporations.;The study shows that a Cost form of transfer pricing is used for strategically attractive markets. Seven of the eight SBU's with an aggressive growth strategy (gain in market share) utilized a form of the Cost method in MNTP. The six SBU's with a moderate growth strategy (maintain market share) were split evenly between Cost and Market methods. The single company with a no growth strategy used a Market method for transfer pricing.;This dissertation demonstrates that tactical management and strategic support can overshadow the economics of a MNTP policy. The present executive concern over MNTP is well justified as this policy formulation goes far beyond an accounting technique for valuation.;A comprehensive decision model validated by the sample, incorporating financial and non financial factors both internal and external to the corporation, is presented. A systematic association of the variables provides the user with a method to logically consider all the relevant variables in a MNTP decision.