While corporations have many legitimate economic reasons for intra-company transfer prices
that appear to differ from prices they may charge externally, tax authorities are concerned with transfer pricing, for among other reasons, because it is a potentially good source of additional revenue.
Of course, the amount of a transfer price
has no effect on pretax entity-level earnings because the seller's revenue is offset by the buyer's cost.
And in Korn and Lengsfeld's model the setting of the sole transfer price
is guided by several concerns: interaction with competitors, minimization of tax burden, and avoidance of punishment.
A transfer price
is the price charged between related parties (e.g., a parent company and its controlled foreign corporation) in an intercompany transaction.
Once a transfer price
is found to be not at arm's length, then an adjustment (the primary adjustment) has to be made to either increase or decrease the transfer price
While this article recognizes that MNE's may abuse transfer prices
, Tax Authorities, in their zeal to augment revenue, fad to distinguish among tax abuse, efficient production methods, and pro-growth tax policy.
A second issue is the selection of a transfer price
, a process complicated by decentralized organizations that grant managers the right to set prices, which in turn affects their performance evaluations and rewards.
"There has so far been significant uncertainty about what evidence the NRA might require in order to substantiate transfer prices
. The guidelines now define the evidential documentation they will generally require when reviewing the transfer pricing during tax audits," Ernst&Young said.
Acceptable transfer price
would be the price assigned according to the existing price on a free, open market in comparable transaction between independent subjects.
The core issue was determining an acceptable transfer price
for the source of Glaxo's U.S.
In their paper, which was awarded the Chazen International Research Prize by Columbia's Graduate School of Business, Reichelstein and his co-authors demonstrate that the optimal internal transfer price
for management purposes should be a weighted average of the producing division's pretax incremental cost and the most favorable arms-length price admissible for tax reporting purposes.
The transfer price
should be equal to the variable costs of the goods or services, plus the contribution margin per unit that is lost.