Transfer Pricing System Research Articles

CUSTOMER ACCOUNTING AND FREE RETURN POLICIES OF RETAILERS

ABSTRACT This case study deals with a retail company. It illustrates how the use of customer accounting can improve its profitability and reshape customer relationships. The case also discusses parameters of appropriate transfer pricing and incentive systems. Students can use this case as an illustrative example in class and use the open-ended questions to reflect on the managerial implications. Keywords Activity-based Costing; customer profitability; target setting; teaching notes; transfer pricing.

Specific Business Models for Romanian Companies – Shared Services

Shared service centres have emerged since the 1990s and refer to a variety of functions: information technology, SAP support, accounting, payroll, management reporting, purchasing, call centres, helplines, market surveys via phone or the internet. Shared service units can be organized in several forms but are in each case, a particular value pattern distinct from the standard market price/ shareholder profit pattern. The purpose of this article is to analyze value patterns, and this article is part of broader research on value-based management. Shared service units can be organized according to the organizational design of the matrix organization, or according to the multidimensional organization. Shared service units may be charged via a transfer price system to the receiving corporate-related company. These are iterative activities, organized according to the activity-based costing logic. Alternatively, shared services can refer to more complex functions that provide service to corporate functions. They can be organized according to the multidimensional organization logic as allocations to the operating units. The value proposition of shared service units differs from market price and profit-driven financial statements. Shared service units require low personnel cost and stability, both of which indicate to Romania as a favourable location. These are the two arguments in favour of shared services as a specific model for Romanian companies, a country in which we find evidence shared services have been set up in the past ten years as parts of corporations.

Transfer Pricing and Deemed Arm’s Length Approaches: A Proposal for Optional Safe Harbour Methods Based on Accurate Predetermined Margins of Profitability

This study analyses the existing transfer pricing methods and their encapsulated tendency to rely on the so-called “deemed arm’s length approach”. It puts the spotlight on the fact that most of these methods already rely, to different levels, on formulae and approximations to reach a deemed arm’s length price. The author proposes an alternative transfer pricing methodology intended to overcome existing challenges, including for developing countries. Avoiding the unitary approach and all its controversies, the proposal maintains the integrity of the separate entity approach that has become the political decision predominantly taken by countries with regard to transfer pricing rules. The author maintains that such an alternative solution would be able to cope with the separate entity approach and the arm’s length standard, as well as with urgent demands such as dispute prevention (anticipating the necessity of dispute resolution), accuracy, transparency, certainty and compliance costs, avoiding double taxation, strengthening defence and countering base erosion and profit shifting. The author considers the opportunity costs for the relevant countries and the private sector and assumes that a simpler, less costly and more reasonable transfer pricing system would attract foreign investment. The proposal deals with measures to make predetermined margin methods accurate at the national and international levels, including issues such as the extension of the predetermined margins list, the periodic update and improvement of the list of fixed margins, the collection of information regarding the settlement of the margins of profitability, the possible collaborative participation of the private sector in the fixed margin-making process and mechanisms to clarify and review the fixed margins. Finally, it proposes that the OECD, along with the United Nations, should make the necessary efforts to build a workable, worldwide network of countries making use of this simpler, less costly and more reasonable transfer pricing alternative.

Activity-Based Costing and Target Setting – A Case Study

Changing a costing system is a major technical effort that is often accompanied by the behavioral resistance of employees who see their existing knowledge and skills of the existing costing system as devalued. This case study exhibits a setting where switching the costing system to activity-based costing (ABC) is imperative, but done in a way that preserves as many aspects of the existing system as possible. Thereby, middle managers exhibit a higher acceptance for basing transfer pricing and incentive systems on the new hybrid costing system. This case study can be used as basis for discussion or as an exam for executive and graduate students in accounting, management, and operations.

Система трансфертного ценообразования на основе метода перераспределения денежных потоков

The article describes the system of transfer pricing based on the method of cash flows redistribution, developed by the author. The article describes such concepts as transfer price, transfer pricing, transfer pricing system. Methodological tools of research: analysis, synthesis, system approach. The author used the method of cash flows redistribution, the description of which is given in this article. The transfer pricing system developed by the author is based on the determination of the transfer price interval on the basis of the transfer pricing methods allowed by tax law, as well as the average value of this interval. This average value can be considered as the average market price, which is determined by the specifics of transfer pricing methods. If there is a deviation from the average market price, there is a redistribution of funds between the subjects of the transaction. For the control of transfer price introduced the coefficient of cash flows redistribution. To manage the transfer pricing system, a matrix of cash flow redistribution coefficients was introduced, as well as the account "redistributed funds". The positive and negative consequences of the introduction of this system of transfer pricing are considered.

INCREASING EFFICIENCY OF BANKING ACTIVITY IN UKRAINE BY GOVERNING PRICING CENTERS OF PROFIT OF THE BANK

The article substantiates the need to increase the efficiency of banking activities in the context of transformational processes which take place in the world in general, and in particular inUkraine. In today’s environment, when banking business becomes more risky, the efficiency of bank activity becomes the basis for making management decisions in banking institutions and establishing mutually beneficial relations between banks and their clients.The author emphasizes the effectiveness of the distribution of banking business to profit centers, which allows to determine the financial result of certain areas of banking business and effectively redistribute bank resources inside the bank. They claim that one of the most risky areas of banking is the purchase and sale of monetary resources, as the financial result of the business and its direct effectiveness depend on the correct pricing of resources. To this end, the article proposes a method for determining the profit centers of the bank and assessing the effectiveness of their activities.The necessity of using transfer pricing in the conditions of the division of banking business to profit centers to improve the method of determining the financial result from banking activity is also grounded in this research. The principle of conditional purchase and sale of resources is used to determine the financial result of the activity of the profit center of the bank. It is an integral part of the methodology for assessing the activity of related business units in the risk-return system. The essence of this principle is that all resources that are attracted to the bank by one unit are conditionally sold to other units of the bank. The author presents his vision for managing the transfer pricing process in Ukrainian banks, which will positively affect the dynamics of banking business performance indicators. It is shown that transfer pricing systems play a significant role in calculation profitability and effectiveness of profit centers on active and passive operations, which makes it possible to consider transfer pricing as a tool for managing the interest rate risk of a bank. The main terms for constructing resources transfer price are defined: transfer price BID, transfer price offer, stimulation margin.

Transfer Pricing in International Markets: Problems of Information Support

The article characterizes the transfer pricing in international markets, analyzes the “arm’s length principle” as the main principle of taxation of interdependent companies, the motivation of transfer pricing participants, the main features of the transfer pricing practice, and the system regulating the transfer pricing at the interstate level. Based on analyzing various aspects of information support for the transfer pricing system, it has been proved that the best approach to improving it is to establish a permanent document flow to substantiate the level of transfer prices and to further draw up management, financial and tax reports. The novelty of the study consists in the recommendations on the sequence of actions to form a unified system of document flow, and management and financial accounting that would provide management with the information on all transactions with affiliates.

On network two stages variable returns to scale Dea models

Multiplicative decomposition of stages indices is shown to be consistent with Vrs network technologies. It is also shown why the primal dual correspondence breaks for serial network Vrs models. Different Vrs models can be associated with alternative transfer pricing systems, within the network. Multiplicative decomposition implies marginal cost pricing across stages. While other pricing systems (full cost) correspond to some of the known non-multiplicatively decomposable Vrs models, proposed in the literature. Stages indices, therefore, respond not only to efficiency, but also to the network’s distributive criteria across stages. The distributive contents of stage indices provide the key element for a solution to the problem of measuring scale efficiency in network systems. Multiplicative decomposable Vrs models can be extended to more general network systems, containing both parallel and in series structures. The cost of this generalisation is that efficiency indices are referred to modified stages, that is to stages that include dummy processes. In perspective, these results contribute to show how organisational aspects, such as transfer pricing systems, could be modelled once network technologies are approached from the multiplier (ratio) side.

Can the integration of a tax-compliant transfer pricing system into the management control system be successful?

PurposeThis paper aims to draw on Adler and Borys’ (1996) concept of an enabling use of bureaucracy to examine how the integration of a single-book tax-compliant transfer pricing system into the management control system is related to the perceived success of that transfer pricing system.Design/methodology/approachBased on survey data from Swiss multinational firms, the authors test a structural equation model. In addition, the authors conduct interviews with executives from three multinational enterprises.FindingsThe authors find that the integration of a tax-compliant transfer pricing system into the management control system may be perceived to be successful in achieving both tax compliance and internal (control) purposes. This is particularly true when the transfer pricing system is transparent and can be amended in the case of fundamental management control problems.Research limitations/implicationsThe typical shortcomings of a survey-based research apply to this study. Future research could build on this model and more closely investigate the relationship between transfer pricing system integration and an enabling use of the transfer pricing system.Practical implicationsBased on this study’s findings, the authors recommend that a strong integration of tax-compliant transfer prices into the management control system should be accompanied by internal transparency and the ability to repair the transfer pricing system.Originality/valuePrior research on the integration between transfer pricing and management control systems has either been analytical or based on case studies. This cross-sectional analysis provides reliable insights into different levels of integration, use and the success of transfer pricing systems.

International Taxation in an Era of Digital Disruption: Analyzing the Current Debate

The “taxation of the digital economy” is currently at the top of the global international tax policymaking agenda. A core claim some European governments are advancing is that user data or user participation in the digital economy justifies a gross tax on digital receipts, new profit attribution criteria, or a special formulary apportionment factor in a future formulary regime targeted specifically at the “digital economy.” Just a couple years ago the OECD undertook an evaluation of whether the digital economy can (or should) be “ring-fenced” as part of the BEPS project, and concluded that it neither can be nor should be. Importantly, concluding that there should be no special rules for the digital economy does not resolve the broader question of whether the international tax system requires reform. The practical reality appears to be that all the largest economies have come to agree either that a) there is something wrong with the taxation of the “digital economy,” or b) there is something more fundamentally wrong with the structure of the current international tax system given globalization and technological trends. This paper is intended as a limited exploration of the second (or third, or fourth) best. It analyzes three policy options that have been discussed in general terms in the current global debate. First, I consider whether “user participation” justifies changing profit allocation results in the digital economy alone. I conclude that applying the user participation concept in a manner that is limited to the digital economy is intellectually indefensible; at most it amounts to mercantilist ring-fencing. Moreover, at the technical level user participation faces all the same challenges as more comprehensive and principled proposals for reallocating excess returns among jurisdictions. Second, I consider one such comprehensive international tax reform idea, loosely referred to by the moniker “marketing intangibles.” This idea represents a compromise between the present transfer pricing system and sales or destination-based reforms to the transfer pricing regime. I conclude that splitting taxing rights over “excess” returns between the present transfer pricing system and a destination-based approach is complex, creates new sources of potential conflict, and requires relatively extensive tax harmonization. This conclusion applies equally to user participation and marketing intangibles. If such a mechanism were nevertheless pursued, I suggest that a formulary system for splitting the excess return is the most manageable approach. Third, I consider “minimum effective taxation” ideas. I conclude that, as compared to the other two policy options discussed herein, minimum effective taxation provides a preferable path for multilateral cooperation.

Transfer Pricing and the Decision-Making Authority of the Tax Function in Multinational Companies

The allocation of decision rights is a fundamental issue of organizational design. We study the decision-making authority and respective outcomes within firms’ transfer pricing function where tax and managerial objectives typically conflict. Exploring unique survey data on transfer pricing systems of multinational companies, we investigate the extent to which the centralization of decision-making authority at the tax department is associated with (external) tax audit conflicts and (internal) coordination conflicts. We find that disputes with local tax authorities are more likely, i.e. tax risk is higher, when the tax department has ultimate authority over transfer pricing decisions. This result is consistent with theory predicting that central tax managers focus on firm-wide objectives instead of easing local tax audits. Internal coordination, however, seems to be unaffected by the allocation of decision rights to the tax department.

The Interplay between Transfer Pricing and Customs Valuation in Case of Retroactive Profit Adjustments: The Position of the ECJ in the Case Hamamatsu Photonics Deutschland GmbH (C-529/16)

This article discusses the position recently taken by the European Court of Justice (ECJ) regarding the impact on customs valuation of the goods of retroactive profit adjustments performed to bring the financial results of the tested party in line with arm’s length results. The article considers issues such as the choice of customs valuation method in case of transfer pricing systems envisaging year-end adjustments, the impact of advance pricing agreements (APAs) on the customs value of the goods, the options available to taxpayers when navigating through the nuances of the interplay between transfer pricing and customs valuation methods.

The Real Appeal of the Border Adjustment Tax

The border adjustment tax can strengthen American business because it may prompt multinationals to move their operations and assets back to the U.S. But that impetus will come from substituting sound economic principles for a broken transfer pricing system, not from taxing imports and exempting exports.

The Conversion From US-GAAP To IFRS And Transfer Pricing: Irreconcilable Differences

Purpose - This paper aims to discuss the challenges the switch from US GAAP into International Financial Reporting Standards (IFRS) pose multinational companies (MNCs); to investigate the transfer pricing of intangible assets with several important trends in the global market; to analyze and discuss the impact of the conversion on intangible assets’ transfer pricing decisions; and to make recommendations to help alleviate problems associated with transfer pricing when switching to IFRS. Design/methodology/approach - The author addresses the conflicts between using the International Financial Reporting Standards and the transfer pricing policies as the multinational companies make the switch from using GAAP to the IFRS and propose some remedies to the related problems. Findings - Transfer pricing systems of MNCs should be carefully reviewed and updated because financial statement information is used and comparability of that information between tested parties and companies to which they are compared is critical to achieving a reliable analysis to help MNCs achieving their global strategic objectives. Research limitations/implications - This research focused on the significant implications on the American MNCs’ transfer pricing strategic decisions resulting from the adoption of the IFRS in general. Further research is still needed to examine the impact of the conversion process on both foreign subsidiaries and the MNC as a whole in different industries. Originality/value - The paper addresses an issue of significant implications on transfer pricing strategic decisions of intangible assets beyond financial reporting as a result of converting financial statements from U.S. GAAP to IFRS.

Specific Business Models for Romanian Companies - Shared Services

Shared service centers have emerged since the 1990s and refer to a variety of functions: information technology, SAP support, accounting, payroll, management reporting, purchasing, call centers, help lines, market surveys via phone or the internet. Shared service units can be organized in several forms but are in each case a particular value pattern distinct from the standard market price/ shareholder profit pattern. The purpose of this article is to analyze value patterns, and this article is part of a wider research on value based management. Shared service units can be organized according to the organizational design of the matrix organization, or according to the multidimensional organization. Shared service units may be charged via a transfer price system to the receiving corporate related company. These are iterative activities, organized according to the activity based costing logic. Alternatively, shared services can refer to more complex functions that provide service to corporate functions, and can be organized according to the multidimensional organization logic as allocations to the operating units. The value proposition of shared service units differs from market price and profit driven financial statements. Shared service units require low personnel cost and stability, both of which indicate to Romania as a favorable location. These are the two arguments in favor of shared services as a specific model for Romanian companies, a country in which we find evidence shared services have been set up in the past ten years as parts of corporations.

Can Transfer Pricing System Integration Be Successful? Yes, it Can!

This paper shifts the approach of transfer pricing research from a traditional transaction-based focus to a focus on the overall transfer pricing system. More precisely, we investigate the relationship between the integration of the transfer pricing system into the management control system, an enabling use of the transfer pricing system and the success of the transfer pricing system. Results from structural equation modeling using the partial least squares technique indicate that the level of transfer pricing system integration is significantly related to its success. This relationship is mediated through an enabling use of the transfer pricing system as indicated by the variables repair and internal transparency. Therefore, based on our results, we recommend strong integration of the transfer pricing system into the management control system. However, the users of highly integrated transfer pricing systems need to be able to truly understand the transfer pricing system and to be able to initiate revisions to it in the event of fundamental problems.

Exploring the Characteristics of Transfer Pricing Systems Across Countries

This paper analyses the characteristics of transfer pricing systems across countries, in order to identify the grouping structures intrinsically related with rules' similarities, and to explore the key characteristics revealed by each group. Applying hierarchical agglomerative technique for comparison of an extensive set of attributes from domestic transfer pricing regulations, we find substantial differences among transfer pricing rules thus to support the segregation of three major groups of countries. The variance across transfer pricing systems refers not only to formal tax provisions, but also to practical requirements and regular actions from authorities, and to governments' openness for discussion of unclear tax positions. Although most regulations follow the main guidelines established by OECD, additional unilateral mechanisms remain, suggesting that countries face distinct profit shifting occurrences and need to create specific measures in attempt to restrain it. It thus implies the existence of gaps in current transfer pricing guidelines, and reinforces the call for new anti-shifting mechanisms to cover a broader set of shifting arrangements.

Intangibles in a BEPS World and How the Netherlands Is Complying with OECD Rules

Many countries have already adopted or are poised to adopt changes to their international tax and transfer pricing systems based on the OECD recommendations under the BEPS project, specifically following the issuance of the package of final reports on 5 October 2015. In addition to discussing the changes to come, the authors address ways in which the Netherlands has implemented the OECD’s recommendations with respect to intangibles.

Documentation of Transfer Pricing: A New Global Approach

Documentation of Transfer Pricing: A New Global Approach Wagdy M. Abdallah Abstract This research paper investigates two important tax issues: (a) an investigation of global documentation of transfer pricing around the world and suggests a new approach for managing transfer pricing documentation and (b) a comparison between the Organization for Economic Cooperation and Development (OECD) guidelines and the documentation requirements of selected countries. Multinational companies (MNCs) should design a well workable transfer pricing systems to comply with documentation tax rules of all countries, otherwise; huge penalties will be imposed. This paper suggests the use of a three-tiered approach, which is called a regional documentation file, for transfer pricing. The suggested approach is a modification of the ones suggested by the OECD. It will include information about regional business and economic conditions of the region, a description of the intangibles used for this specific area, and consolidated financial statements by region and tax documents. Moreover, it will make a significant cost reduction for MNCs in the preparation of transfer pricing documentation. Full Text: PDF DOI: 10.15640/ijat.v4n2a4

THE CONCEPT OF TRANSFER PRICING SYSTEM IN RUSSIAN FEDERATION

The article presents the author's denition of transfer prices and transfer pricing based on the analysis of the current legislation in Russia as well as on current economic practice. Considered state regulation of transfer pricing for the purpose of harmonization of relationship between government and business. Given the denition of the transfer pricing system in Russian Federation and the description of its main parts and connections between them, necessary for effective functioning.