Transfer Pricing Systems and Performance Measurement in Multinational Enterprises
The management control system (MCS) literature has traditionally studied the role of transfer pricing for achieving goal congruence and for measuring and evaluating managers' performance. In multinational enterprises (MNEs), however, transfer pricing policies must help achieve an additional set of goals, including profit maximization and minimization of taxes. In addition, international transfer pricing is subjected to strict tax regulations. The aim of this study is to investigate how MNEs handle the management control role of transfer pricing in an international context where compliance with tax regulations is required. To achieve this objective an exploratory case study has been undertaken at one MNE. This company used the same set of - fiscally approved - transfer prices for tax compliance and for internal use and viewed tax compliance as a strategic priority. Our exploratory case study demonstrates that organizational structure, degree of decentralization and type of responsibility centers impact the effectiveness of the transfer pricing system. Based on our case observations and a review of the extant literature we derive a more general framework on transfer pricing and performance measurement in the context of cross-border transactions as the basis for future research in this area.
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