Transfer Pricing for Corporate Treasury in the Multinational Enterprise

Abstract

Intercompany financing transactions are becoming increasingly important to multinational enterprises (MNEs) as they expand internationally. Corporate treasurers of MNEs have many responsibilities, including the management of international capital structure and cost of capital, the financing of cross‐border acquisitions, foreign direct investment, international capital budgeting and cash management, management of foreign exchange and transactional risk, and port‐folio and investment management.This article focuses on a corporate function, transfer pricing, that is potentially relevant to each of these activities. Whenever a payment crosses borders in a treasury context—whether to provide a loan, purchase a receivable, provide a guarantee, sweep cash, factor a receivable, provide a hedge or insurance product—a transfer pricing issue is present. Transfer pricing is often viewed as a taxation issue and thus the responsibility of the corporate tax department. This article challenges that view, and makes the case that an integrated, multi‐functional approach to MNE treasury planning in the context of transfer pricing can be an important component in improving the efficiency of cross‐border financial management. The paper uses conceptual and empirical information as well as numerical examples to illustrate relevant tax and transfer pricing concepts for policy planners and others responsible for MNE treasury and tax planning.