Integrative Management of Transfer Pricing and Global Supply Chain in a Multinational Firm

Many multinational firms (MNFs) in recent years have put their efforts into developing tax-effective supply chain strategies that integrate tax considerations across different countries and take advantage of specific tax incentives. These strategies oftentimes involve the management of internal transactions taking place between divisions or subsidiaries belonging to the same MNF but located in different countries. Transfer pricing (TP), the pricing for transactions between divisions of an MNF, has been used not just as a tool to facilitate internal transactions; many MNFs also recognize the importance of combining the TP decisions with their tax considerations in improving their overall profitability. In this study, we study two kinds of TP (ex-post TP and ex-ante TP) that are commonly adopted in current practices, and their relationship with MNF's global supply chain decisions.;In the ex-post TP study, a MNF produces and sells products in markets located in different tax jurisdictions through a transfer price determined ex post. We derive the optimal operations decisions under both centralized and decentralized supply chain structure and evaluate the impacts of tax environments on the MNF's global supply chain performance. We show that the MNF's desire to maximize its global after-tax profits could cause retailing divisions to behave differently from what we expect under the traditional supply chain settings.;In the ex-ante TP study, we mainly focus on the scenarios that are suitable for applying the arm's length principle. First, we consider the TP decision in a stochastic final market demand setting by further assuming the existence of domestic intermediate product market. Multiple factors, e.g. income shifting, loss consideration, double marginalization and etc. will exert various impacts on the determination of optimal transfer price. Meanwhile, the analysis shows that the change of elements, such as a larger market size, a lower production cost, which seems to be positive for the MNF by intuition, may have non-monotone impact on the MNF's global TP strategy. Second, we investigate another interesting phenomenon that the MNF's manufacturing division not only produce the products of their own brand but also the ones of other brands, which are the MNF's competitors in local markets usually. In practice, these products are naturally the same no matter what their brands are and thus the MNF is obligated to set the same transfer price ex ante according to the arm's length principle. We analyze the multiple roles TP played in MNF's making-for-competitor strategy as well as the incentives for both the MNF and its competitor to join the competition with cooperation to certain extent. The results imply that the strategic considerations both parties have induce the behaviour different from conventional wisdom, e.g. the cheaper sourcing option is not be the optimal choice. Furthermore, the managerial insights are generated to help us to understand the underlying motivation better.