The Application Research Of China’s Multinational Corporation Transfer Pricing

Currently there are many research literatures related with multinational corporation transfer pricing. Most of these literatures focus on the situation in which China is the host country and foreign MNC sell products or provide services in China, investigate the problem of China’s tax revenue losses caused by foreign MNC, and propose some response measures. However, little research has been done on quantitative analysis of China’s MNC transfer pricing. In order to cope with this specific issue, this paper starts with the perspective of quantitative analysis of MNC transfer pricing, and proposes an effective model to explore the issue of transfer pricing of China’s MNC in the oversea market.In this paper, the process of constructing and validating a transfer pricing model is divided into three parts. In the first part, we construct a transfer pricing model in which the transfer price is the independent variable and many factors, such as the attitude of managers or decision-makers when they meet risks, are considered. Using the data from a China’s MNC, this paper conducts an experiment on this model. In the second part, another model is constructed on the basis of the first model, in which some assumptions are relaxed (e.g. the condition of zero-inventory in a subsidiary is no longer valid), the independent variables are the quantity and price of transferred products, and the market demand of the subsidiary follows a normal distribution. Using the data from a China’s MNC, the second proposed model is validated. Lastly, in the third part, this paper introduces many time-related uncertain factors that managers or decision-makers need to consider when they set the transfer price, and presents an idea of combining the real option theory and prospect theory together to analyze transfer pricing. In addition, by using the variables that meet Brownian motion in the real option theory and substituting the time-related variables into functions of prospect theory, a comprehensive transfer pricing model can be constructed. From the constructed transfer pricing models and date validation of MNC, we can find that with premise of maximizing the utility function and meeting the transfer pricing tax system range, the optimal transfer price does exist. Besides, the following conclusions can be got:1) The transfer prices chosen by corporations from different industries vary. For the service industry which can achieve zero inventories, the chosen transfer price is at the endpoints of the transfer pricing range; for the MNC of non-service industries, the chosen transfer price is not always at the endpoints of the transfer pricing range.2) When the managers or decision-makers of MNC choose the transfer price, many related factors should be taken into account, such as the income tax rate, tariff rates and the functional distribution met by the subsidiary sales market. The research find that when the values of other variables and parameters are fixed, if the income tax rate is lower than a certain value, the transfer price is the lowest value in the range; otherwise, within certain range of corporate income tax rate, the chosen transfer price would present an inverted "V" shape in some small intervals. Besides, the distribution function of subsidiaries’sales can also affect the transfer price. Thus, when choosing the transfer price to maximize the profit, the managers or decision-makers from a MNC should consider the income tax rate, tariff rates and subsidiaries’sales.3) The behavior of expanding oversea markets by MNC should be considered as a time investment, the uncertain factors faced by MNC are related with time, and the transfer pricing decisions will change with the new information. Thus, the transfer pricing model should incorporate time-related arguments, choose the utility function as the objective function, and select the optimal transfer price to maximize the benefits.