U.S. income tax transfer-pricing rules and resource allocation: the case of decentralized multinational firms

Article Abstract:

An analytical model is used to examine US income tax transfer-pricing rules on resource allocation in decentralized multinational enterprises (MNEs) in the absence of differential taxation. The model is based on a foreign manufacturing division that transfers a product to a US distribution division that markets it as part of a final product. Research results indicate that cooperation is in the interest of both divisions. In an environment characterized by differential tax rates but no transfer-pricing rules, the optimal resource allocation of MNEs is the same as in the absence of taxes, but profits are not maximized. In an environment characterized by the resale-price method of computing transfer prices, research results indicate different results dependent on the divisions' bargaining power.

Analysis, Corporate taxes, Tax research, Corporations, Income tax

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U.S. income tax transfer pricing rules for intangibles as approximations of arm's length pricing

Article Abstract:

Intercompany transfer pricing regulations introduced by the Treasury Dept. in 1994 are aimed at moderating the preference of multinational enterprises (MNEs) for transferring of income to lower-taxed jurisdictions resulting from the use of intangibles. The new rules suggest three alternative methods: comparable uncontrolled transactions, comparable profit method and profit split. However, the three methods proscribed in the rules only encourage these enterprises to shift resource allocations compared to a full-information optimum. A study examining the resource allocation changes under each method shows that another alternative is better. Direct valuation may be a better option for regulating transfer-pricing practices of MNEs.

Laws, regulations and rules, Intangible property, Intangible assets

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The effects of the U.S. income tax regulations' transfer pricing rules on allocative efficiency

Article Abstract:

The resale price method and the cost plus method are the most commonly used methods of transfer pricing. The effects of these methods on resource allocation decisions is examined for cases in which the foreign tax rate is lower than the domestic one. Results show that the resale price method can cause an overuse of domestic resources, an increase or decrease in imports, and overproduction. The cost plus method causes a decrease in the use of domestic resources, a decrease in imports, and overproduction. When the foreign tax rate is higher than the domestic one, results are reversed.

Accounting and auditing, Pricing, Resource allocation

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