A STUDY OF DETERMINANTS OF TRANSFER PRICING IN MULTINATIONAL CORPORATIONS: THE CASE BETWEEN U.S. PARENTS AND THE EGYPTIAN UNITS (UNITED STATES, EGYPT)

The principal objective of this study was to examine the determinants that influence transfer pricing policies between U.S. multinational corporations and their units operating in Egypt and find a relation between these determinants and transfer pricing methods. Data for the analysis were gathered through a questionnaire survey of 225 American corporations that have Egyptian units. The response rate was 18.0 percent. The questionnaire asked the recipients to evaluate the importance of eighteen suggested transfer pricing determinants and indicate the method(s) of transfer pricing they use for products and services transferred to their Egyptian units. The factor analysis procedure was used to reduce the 18 determinants to a smaller number of factors. It resulted in six main factors as follows: (1) Economic conditions in the country and the competitive position of the unit. (2) Restrictions imposed by the Egyptian government. (3) Financial reporting requirements and performance evaluation. (4) Income taxes and interest of local investors. (5) Antidumping regulations and need of the unit to seek local funds. (6) Volume of interunit transfers and risk of expropriation.;Multiple discriminant analysis was used to find the relationship between three basic transfer pricing methods (cost-based prices, market-based prices, and negotiated prices) and the suggested transfer pricing determinants and develop a function that would predict the use of each method. The discriminant function did not effectively differentiate among the users of the three transfer pricing methods. The same four determinants weighted equally high on each method. These determinants were the competitive position of the unit, maintaining good relationship with the Egyptian government, overall corporate profit maximization, and compliance with IRS regulations. The exception was that compliance with IRS regulations weighted first on the market-based transfer prices.