What Are The Main Objectives Of An MNE's Transfer Pricing Policy

International taxation

What are the main objectives of an MNE's transfer pricing policy? Can these different ranges of objectives can be satisfied in practice

Summary

Introduction...........................................................................................................

The role of Transfer Pricing Policy.........................................................................

The main issues......................................................................................................

International environment....................................................................................

Strategic motivation..............................................................................................

Pricing Objectives.................................................................................................

Strategic objectives of Transfer Pricing Policy.....................................................

Taxation-related Objectives...................................................................................

Internal or Management-oriented Objectives........................................................

International or Operational Objectives.................................................................

First, from a competitive point of view, it is essential to understand how the multinational firm operates. Multinationals have the power to exert a tremendous amount of influence. The aim of their existence is to get the ability to utilize operations in a variety of countries. Normal operations for these firms involve the transfer of goods, raw materials, intangibles or services between related entities of the multinational parent. And since those entities are related, yet separate, a transfer price must be necessary to the transfer. The importance of the concept of transfer pricing is highlighted by the fact that companies must select transfer pricing strategy regarding financial, legal and operational considerations.

In other words, the transfer price is the internal value placed on a raw material, good or service as it moves from a related organizational entity to another within a consolidated corporate group. Transfer pricing is an accounting convention which is receiving an increasing amount of public concern. Indeed, much of the attention focuses on how multinationals firms employ transfer pricing to avoid income taxes. Importantly, the main objective is to minimize the tax.

Transfer pricing is a strategy rather than a procedure. Indeed, the transfer pricing method employed by a firm is how it executes the transfer pricing strategy. If firms employ transfer pricing to accomplish multiple objectives, then the effectiveness of transfer pricing becomes even more important to overall corporate success. Given the complex environment in which those operates the objective of this study is to determine what are the main objectives of a MNEs transfer pricing policy and then we will see if these different ranges of objectives can be satisfied in practice.

The Role of Transfer Pricing

Transfers allow MNEs to exercise its multinationality. If the MNEs acted solely without transfers, then there would be no rational for it to exist and domestic firms would dominate each country’s marketplace. So, since separate legal entities are involved which compete in different countries, it is necessary to assign a value to the transfer of products.

Transfer pricing plays a more critical role in an international environment. Indeed, the multinational firm is faced with numerous complicated factors within the global marketplace. While the internal issues of management evaluation and performance are significant for these companies, they must be considered in conjunction with issues such as taxation, competitive advantage, foreign exchange, cash control and inflation.

Corporate strategy may be viewed as an organizational process consisting of the formulation and implementation. Transfer pricing falls into the implementation phase of strategy. It is apparent that the transfer pricing policy is an integral part of the organization’s strategy and should not be considered in isolation as only an accounting technique.

Through the above figure, we can see that transfer pricing is a managed activity that contributes to achieving corporate objectives. Other actions such as strategic alliances, joint ventures, incentive compensation plans for executives, and direct foreign investment may also be employed.

Important Issues

International environment:

The MNEs must take decision about different national markets and competitive situations, and then assimilate and coordinate those decisions to make a cohesive plan for transfer pricing. It is really challenging to make decisions which apply uniformly in a variety of national markets. Moreover, it becomes also complicated to juggle with the use of strategic alliances between companies.

Strategic motivation:

Actually, strategy cannot be carried out without a control system. Indeed,

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